India emerges from virus-driven recession after drop in Covid cases

India’s economy emerged from recession in the final quarter of 2020, growing 0.4 per cent year on year as a sharp drop in coronavirus infections allowed businesses to reopen and consumers to venture back to offices and shops.

The expansion in output in the three months to December came after India’s gross domestic product contracted by a record 24 per cent year on year in the quarter to June and then by more than 7 per cent in the following three months, as it took a double hit from a strict and lengthy lockdown and one of the world’s highest coronavirus caseloads.

Although the increase in output was slightly smaller than analysts had expected, it added to their hopes that the Indian economy had turned a corner.

“The [economic] trend so far has been quite positive, predominantly [because the] number of infections that has remained under control,” said Radhika Rao, an economist at DBS Bank in Singapore. “This has helped the economy recover much faster than what was expected earlier.”

However, she noted, “the actual number was more modest versus our expectations”.

Other recent economic data suggested the rebound continued in the early weeks of 2021. Nomura’s Indian business resumption index is approaching pre-pandemic levels as a result of higher labour force participation and rising power demand.

But economists warned that despite the signs of recovery, the pandemic is likely to leave deep economic scars, particularly in India’s vast informal sector.

Capital Economics said it expected India’s banks to prove a weak spot which could stymie growth in the long run as even before the pandemic India suffered from one of the world’s highest bad loan ratios.

“The ailing banking sector looks set to take a further hit this year as more loans turn sour, which we think will prevent the economy from returning to its pre-virus trend any time soon,” the research firm said in a note.

Economists and businesses said that keeping infections under control will be crucial to ensure a sustained recovery. India’s daily Covid-19 infection count has fallen sharply, from nearly 100,000 new cases a day in September to below 10,000 a day this month.

However the total has risen due to an outbreak in Maharashtra, pushing up daily cases as high as 16,000 on some days this week. In total India has recorded more than 11m infections and 150,000 deaths.

Rao warned that further improvement was “a function of two things . . . that the [infection] curve remains under control and that the vaccination rollout [continues] apace”.

India aims to vaccinate 300m of its nearly 1.4bn population by August, but at the current pace of around 400,000 inoculations a day, it would take four years to hit that target.