Economy to brace itself for tepid recovery after the summer

22 June 2020 Consultancy.in

Following a sharp, unprecedented decline of nearly 10% in real GDP this summer, India’s economy will see a tepid recovery in the next twelve months. This is according to a new in-depth report from Praxis.

India’s economy was already in a period of decline over the course of last year. According to PGA Labs – the business research arm of management consultancy Praxis Global Alliance – a severe recessionary period over the course of last year had brought India’s economic performance down to its lowest point in years.

In fact, the recession last year offset the steady economic recovery that India was building from policies such as demonetisation and the Goods & Services Tax back in 2016 and 2017. Worst hit were the automotive, pharma and real estate sectors, which were the first to feel the effects of spending cuts.

India's economic trajectory since 2016

Come the end of last year, promising signs were starting to emerge, which have now been derailed entirely by the Covid-19 crisis and its economic impact. Not only did the crisis hit a weakened Indian economy, it also hit against the backdrop of a subdued global economy, riddled with uncertainty from trade wars and internalisation. 

The crisis sent India’s GDP growth rate plummeting by nearly 10% – a rate that is likely to persist for the coming weeks. This period of decline has been labeled phase one by the research firm. Output has been unprecedentedly low during this phase, driven by a global demand shock for consumer activity and trade. 

Nevertheless, India has recently emerged from the lockdown, which might begin the slow and steady recovery curve towards the end of this month. Over the next three quarters – phase two – Praxis anticipates “tepid recovery,” driven by government initiatives and small amounts of reactionary spending. The ongoing liquidity crisis is likely to persist through this phase, while the economic growth rate will continue to fall significantly short of pre-crisis levels.

India's economy will take seven quarters to settle into a 'new normal'

Phase three will continue for three to four quarters after the second phase, characterised by sluggish growth due to the ‘shock’ of Covid-19. Overall, the researchers anticipate the Indian economy will take seven quarters at the very least to regain its previous momentum, which will take us well into the 2022 financial year.

Impact by sector 

These forecasts are generalised for the economy as a whole. Zooming in to individual sectors offers a much more nuanced perspective of growth and recovery. In its analysis, the researchers point out that the lockdown and the consequent economic impact will have a short term impact on some sectors, while others face a persistent uphill battle.

For instance, sectors such as foodtech, digital lending and ecommerce have had a slight hurdle in the short term, but are likely to see considerable long-term benefits from the changes in consumer priorities brought about by the crisis. A preference for online commerce is among these changes.

Other segments such as online gaming, health tech, digital media and e-groceries have all seen a boom in the short term, and are also likely to have an extended period in the sun. The lockdown has pushed many to look online even for basic needs such as groceries – a trend that is not likely to fizzle out in the near future. Praxis anticipates a growth rate of 40% to 50% for e-groceries over the next four years.

Education technology (EdTech) is another such case of essential activity moving online. A growth rate of 50% to 55% is expected for EdTech till the 2024 financial year, accelerated by the crisis. Another sector that has perhaps seen the most direct benefit from the crisis is the HealthTech sector. A RedSeer Consulting report from earlier this year said that the eHealth sector – currently valued at $11 billion – is likely to reach a value of $16 billion by 2025.

The report reinforces this prediction, anticipating growth of 30% to 40% between now and 2024. Digital media has been another beneficiary, while online gaming has been among the  bright spots in India’s media & entertainment sector. The segment is expected to grow by up to 35% over the next four years.

Covid-19 economic impact by sector

At the other end of the spectrum, perhaps the most adverse impact has been on sectors such as hospitality & travel, apparel, real estate, and automotive. These sectors have not only been affected by the lockdown, but an overall spending crunch and a renewed preference for online consumption is likely to damage revenues for them in the long term as well.

Hospitality and travel has seen a direct demand shock since the lockdown, while many predict that the sector will take years to recover from the crisis. Over the next four years, the sector will only grow by around 10%, despite travel opening up in the months to come. Nervousness about travelling and a spending crunch are likely to cause this scenario.

The apparel retail sector was already under threat from ecommerce before the lockdown, while the automotive sector was struggling with the recession. Apparel & footwear will still manage a 10% growth rate in the years to come, while growth for automotive will stay below the 5% barrier.

Praxis recommends that each sector examine the specific needs of its consumers, and how they may have shifted during the lockdown and beyond. The ‘new normal’ is coming, and the firm suggests that companies prepare.

In a recent report, McKinsey & Company outlined some of the top challenges to reopening the economy.


More news on
×