Growth would remain negative throughout the fiscal, the think tank said in its Quarterly Review of the Economy report for the July-September quarter, released on Friday.
The second quarter would see a 12.7% contraction followed by -8.6% and -6.2% for the third and fourth quarter respectively, the report said.
Highlighting the uncertainty of a longer term outlook it said, “The key question is how the economy will perform thereafter. References to V-shaped recovery etc. obfuscate more than they reveal.”
In the medium-long term, India’s growth was unlikely to reach the peak output levels seen in the previous fiscal till the end of 2022-23, it said, noting this was under the ‘optimistic’ assumption of 7% growth in FY22.
“A more likely scenario is that after getting back to its previous peak output level by 2022-23 the economy will settle back to its pre-pandemic growth path of 5.8 per cent,” NCAER said.
The report pegged inflation for the second quarter at 6.6% and only a percentage point lower at 6.5% for the fiscal year, both beyond the Reserve Bank of India’s (RBI) tolerance band of 2-6%.
Coupled with the steep contraction in growth, this made the conventional approach to monetary and fiscal policy inadequate to deal with the crisis.
On the fiscal side, it estimated the combined fiscal deficit at 13% of gross domestic product (GDP) along with a total public sector borrowing requirement of 14-15% of GDP.
This in turn put pressure on the RBI, which has to enable markets to absorb this massive borrowing requirement while avoiding a spike in bond yields.
“It seems inevitable that at least a part of this borrowing will have to be monetised to avoid excessive pressure and crowding out in the financial markets,” the report said.
This called for wide ranging reforms that were “no less ambitious than the reforms of 1991”. The government should focus on maintaining the stability of the financial sector through stronger supervision of banks and financial institutions.
It also recommended resolution of non-performing assets through the creation of a bad bank, partial disinvestment and governance reforms in public banks and more effective incentives to induce lending to micro, small and medium enterprises.