India enters into technical recession during H1 2020-21 for first time in history

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The incoming data for the month of October 2020 have brightened the near-term outlook for the Indian economy and stirred up consumer and business confidence

India has entered into a technical recession in the first half of 2020-21 for the first time in its history with Q2:2020-21 likely to record the second successive quarter of Gross Domestic Product (GDP) contraction, said the Reserve Bank of India.

The index nowcasts GDP growth at (-) 8.6 percent in Q2:2020-21, implying that India is likely to have entered a technical recession in the first half of 2020-21 for the first time in its history with two successive quarters of GDP contraction, said the RBI in its monthly bulletin on Wednesday.

The RBI’s Economic Activity Index for India from twenty-seven monthly indicators using a dynamic factor model suggests that the economy rebounded sharply from May/June 2020 with the reopening of the economy, with industry normalising faster than contact-intensive service sectors, pointing to a short-lived contraction, said the RBI bulletin.

The contraction is ebbing with gradual normalisation in activities and expected to be short-lived.

At a time when global economic activity is besieged by the outbreak of the second wave of COVID-19, incoming data for the month of October 2020 have brightened the near-term outlook for the Indian economy and stirred up consumer and business confidence, said the RBI report.

There are, however, formidable downside risks that confront the path of recovery.

Preliminary estimates show a jump in household financial savings to 21.4 percent of GDP in Q1 of 2020-21, up from 7.9 percent in Q1 and 10 percent in Q4 of 2019-20, said the report.

The sharp increase is counter-seasonal and may be attributed to the COVID 19-led reduction in discretionary expenditure or the associated forced saving and the surge in precautionary saving despite stagnant/reduced income, it said.

The yawning gap between credit extended and deposits mobilised during the Q1 of 2020-21 contributed to the spike in household financial savings as the financial instruments relating to banks continue to dominate the household financial assets and liabilities.

The increased flows to mutual funds seems to have been driven by the relative returns on bank deposits, particularly when the stock markets rebounded after an initial volatility in the wake of COVID-19.

Again, the rise in subscription to insurance products reflects the pandemic-led increased awareness of life insurance amongst the households faced with a health crisis.

The estimated increase in financial savings looks consistent with other macroeconomic statistics, in particular, the decline in private final consumption expenditure and the surplus position in the external current account, the report said.

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