India’s economy is likely to enter a recessionary phase for the first time ever in the second quarter (July-September) of the current financial year, with the Gross Domestic Product expected to contract by 8.6%, the Reserve Bank of India said in a bulletin released on Wednesday.

Technically, a country’s economy is said to hit recession when its GDP growth is negative for two consecutive quarters or more. India’s economy had contracted by an unprecedented 23.9% in the first quarter (April-June) of this financial year, after being hit by the coronavirus pandemic and the subsequent economic slowdown.

In an article titled “State of the Economy”, the central bank in its bulletin, “nowcast” the contraction in the second quarter based on quarterly results declared by 887 non-financial listed companies, whose sales remained in contraction in the second quarter. “Nowcasting” is the prediction of the present or the very near future of the state of the economy.

The RBI, however, noted that the contraction is “ebbing with gradual normalisation in activities and expected to be short-lived”. The central bank cited improvement in indicators like aggregate demand, Goods and Services Tax collection and manufacturing activities to suggest that the economy is picking up pace.

The RBI also said that the National Statistical Office will formally announce the GDP numbers for the second quarter in end-November.

Inflation to remain high

Besides the contraction in economy, the central bank also flagged the downside risk of high inflation in the coming months.

“The foremost [risk] is the unrelenting pressure of inflation, with no signs of waning in spite of supply management measures,” the RBI observed. It said that the inflation levels may result in “a loss of credibility in policy interventions”, taking a toll on the “nascent growth impulses”.

Retail inflation in September rose to 7.34%, the highest since January, and well above the RBI’s mandated range of 2% to 6%. The inflation numbers for October are expected to be released on Thursday.

Apart from the price rise scare, the RBI flagged two more concerns, that of a second wave of the virus and a “stress intensifying among households and corporations that has been delayed but not mitigated”. The central bank said that a second wave of Covid-19 can have an effect on collapsing external demand, while the stress in households and corporations ran a risk of spilling over to the financial sector.