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India's GDP Shrinks as Covid-19 Keeps Stranglehold on Economy

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India’s GDP shrank 7.5% last quarter. A market in New Delhi on Nov. 13.

India’s GDP shrank 7.5% last quarter. A market in New Delhi on Nov. 13.

Photo: Prashanth Vishwanathan/Bloomberg News

NEW DELHI—The coronavirus pandemic has strangled one of the most powerful engines of economic growth in the world: spending by India’s 1.3 billion consumers.

The country’s gross domestic product shrank 7.5% last quarter compared with a year earlier, India said Friday, as Covid-19 has transformed the world’s fastest-growing economy into one that is now among those contracting the fastest.

With more than 9.3 million people infected and 135,000 killed by the virus, India has been hard hit by the pandemic. Even after the nation started ending its lockdown in stages in May, people have been staying home, conserving their rupees and riding out the storm.

The latest GDP data marked the first time in decades that the country’s growth has contracted for two consecutive quarters.

By contrast, in the most recent quarter, the U.S. economy contracted 2.9% year-over-year, while China’s economy grew 4.9%, according to the latest tally from the Organization for Economic Cooperation and Development.

Covid-19 has kept people from spending, said 33-year-old Krishna Kumar, who has been selling sweet chai tea from a cart in Dehradun, a city in the Himalayan state of Uttarakhand, for half his life. He said it has never been this bad.

He said he had to lay off two of his employees, as the number of customers he gets daily has dropped to about 20 from around 100 before the pandemic hit. The few that show up now are the guards and drivers from nearby offices who ask for discounts because they are struggling too, he said.

The pain that his tiny tea and samosa business is feeling trickles down, he said. “If they buy from us, we can spend on milk, potatoes and spices, helper salaries and rent,” he said. “We can drive growth.”

Many Indians, lacking a government safety net, savings or confidence they can get a hospital bed, are fighting the pandemic the only way they can, by staying away from strangers. That means less shopping.

Google mobility data shows activity around retail and recreational locations in India was around 50% below normal levels during the quarter. In the U.S., movement was only about 15% lower than usual, according to the data.

At the same time, savings have shot up as people put money aside, in case they lose their incomes or need to cover medical expenses.

Most other countries have shown more resilience and a quicker rebound toward normal activity, said Anagha Deodhar, an economist at ICICI Securities.

“India’s reopening was quite gradual compared to other economies, and Covid has still not been brought under control,” he said. “There’s a lot of reluctance on the part of the consumers to go out and shop.”

India’s death rate from Covid-19, relative to its large population and the number of confirmed infections, is low compared with the rest of the world, but the economic damage it is taking is among the worst.

The almost 24% plunge in GDP in the previous quarter was the worst on record, reflecting the three months through June, when much of the country’s economy was effectively closed. India’s economy was already struggling with a slowdown when Covid-19 started to spread.

The news isn’t all bleak, however. There are signs that manufacturing activity is recovering. Data firm
IHS Markit’s
purchasing managers index for manufacturing for India—a measure of activity in the private sector—was 58.9 in October, an improvement from a low of less than 30 in April. A reading above 50 indicates that activity is increasing, while a reading below points to a decline in activity.

Growing optimism in the manufacturing sector could be due to filling orders from pent-up demand, as well as hopes that a vaccine may be around the corner. But the average consumer still isn’t spending, economists warned.

“Consumer sentiments continue to remain bleak,” even as lockdowns have loosened, said Diptanshu Ray, a retail analyst for Nielsen Global Connect. “There has been a continuous decline in the Consumer Confidence Index since March.”

India’s retail spending has picked up during the Diwali holiday season.

India’s retail spending has picked up during the Diwali holiday season.

Photo: Prashanth Vishwanathan/Bloomberg News

India is on track to see its economy slide by around 10% this year, economists said, far from the more than 6% growth it needs to create jobs for its growing population. The country could see more than 100 million people fall back into poverty, according to a study this year from the United Nations University World Institute for Development Economics Research.

New Delhi has been trying to boost economic activity with many stimulus packages it says will pump around $400 billion, or around 15% of the country’s GDP, into the economy. Much of that total isn’t actually new spending but measures to increase lending. It also includes figures such as tax rebates that have been fast-tracked and looser restrictions on lending.

The government of Prime Minister Narendra Modi, however, doesn’t have the benefit of the revenue or low lending rates that developed countries are using to reinvigorate their economies.

Retail spending has picked up during the Diwali holiday season, but the gains could be short-lived if infection numbers continue to surge, India’s central bank governor, Shaktikanta Das, said Thursday.

“Downside risks to growth continue due to recent surge in infections in advanced economies and parts of India,” he said in a speech. “We need to be watchful about the sustainability of demand after festivals and a possible reassessment of market expectations surrounding the vaccine.”

Write to Eric Bellman at eric.bellman@wsj.com

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