Business Economy

Indian economy contracts by 7.5% in Q2

Country enters technical recession.

India’s Gross Domestic Product (GDP) contracted 7.5% in the second quarter of 2020-21, following the record 23.9% decline recorded in the first quarter, as per estimates released by the National Statistical Office on Friday. The country has now entered a technical recession with two successive quarters of negative growth. 

However, the economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated. While most had estimated a contraction of around 10%, the Reserve Bank of India had projected a 8.6% decline in the second quarter. 

Indian economy contracts by 7.5% in Q2

Sharp recovery

Agriculture, which was the only sector to record growth between April and June this year, grew at the same pace of 3.4% in the second quarter, while manufacturing gross value-added (GVA) staged a sharp recovery to record 0.6% growth between July and September after collapsing 39.3% in the first quarter. 

Electricity, gas, water supply and other utility services also recorded 4.4% growth in the second quarter, recovering from a 7% contraction in Q1. But it remained a bleak quarter for several sectors, including mining, services such as retail trade and hotels, construction and financial services. 

“We should be cautiously optimistic as the economic impact is primarily due to the pandemic and the sustainability of the recovery depends critically on the spread of the pandemic. The government remains ready to come up with calibrated responses,” said Chief Economic Adviser (CEA) Krishnamurthy Subramanian, stressing that there could be neither too much exuberance nor excessive pessimism at this point.

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Citing the uncertainty caused by the pandemic, Mr. Subramanian said the ‘V-shaped recovery’ should continue but it is difficult to be sure about positive growth returning in the remaining two quarters of this year. Finance Minister Nirmala Sitharaman had earlier suggested that the economy could record near zero growth in 2020-21. 

“The economic indicators and the industrial output numbers indicate that the recovery is happening very well. But because the effect is primarily from the pandemic, we should keep that in mind especially with the winter months ahead,” Mr. Subramanian told The Hindu

‘Very encouraging’

“The recovery is clearly very encouraging but this is still a period of uncertainty, and is reflected in the fact that the actuals are more encouraging than the estimates of several commentators,” he said.

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Rating agency Crisil attributed the better-than-expected growth to pent-up demand, support from agriculture and select export sectors, cost savings for corporates and a ‘learning to live’ attitude. 

“The second-quarter (Q2) GDP data have lent a positive bias to our full-year call of 9% contraction. However, there are some signs of flattening of economic activity in the third quarter which will need to be monitored closely along with the further spread of COVID-19,” said the firm’s chief economist Dharmakirti Joshi. 

Construction sector

The construction sector, which had contracted 50.3% in the first quarter at the peak of the lockdown against COVID-19, saw some improvement with contraction narrowing to 8.6% in the second quarter.

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Trade, hotels, transport and services remained deeply affected, shrinking 15.6% between July and September after a 47% dip in Q1. Mr. Joshi expects the services sector to be more vulnerable in the second half, particularly contract-based services. 

“Till the pandemic doesn’t go away, some of the sectors affected by social distancing such as services like travel and tourism will continue to experience demand slump. And services accounts for a good part of India’s GDP,” Mr. Subramanian said. 

Govt. spending 

While the 7.5% contraction in GDP came as a positive surprise, there are concerns about a decline in government spending and the worsening fate of two key sectors compared to the first quarter.

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“The loss of momentum in government spending in the second quarter led to a 22% contraction in government final consumption expenditure. As a result, this component turned into the worst performer on the expenditure side from being the best performer with a 16.4% expansion in the first quarter,” pointed out Aditi Nayar, principal economist at rating agency ICRA. 

The CEA responded to these concerns by pointing to improved private consumption and investment. Consumption contracted by 11.32% in the second quarter, compared to a 27% decline in the first. Investment demand as measured by Gross Fixed Capital Formation improved from -47% in the first quarter to -7.4% in Q2. 

“The Indian economy is driven 90% by private consumption and investments and the improvements in those numbers, despite some decline in government spending, I would read as a positive sign,” he said. 

Financial, real estate and professional services recorded a 8.1% contraction in GVA from a 5.3% dip in Q1, while the GVA from public administration, defence and other services contracted 12.2% from a 10.3% shrinkage in the first quarter. 

Ms. Nayar also urged caution on reading too much into the manufacturing sector recovery, as it could be driven by aggressive cost-cutting measures, a lower wage bill and benign raw material costs. 

“The extent of the recovery in the performance of the informal sectors in Q2 remains unclear, and we caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors,” she said. 

Lockdown curbs 

The National Statistical Office also stressed that its estimates are hampered to some extent by the restrictions imposed in the first quarter of this year during the national lockdown. 

“Though the restrictions have been gradually lifted, there has been an impact on the economic activities. In these circumstances, some other data sources such as GST, interactions with professional bodies, etc. were also referred to for corroborative evidence and these were clearly limited,” it noted. 

Source: thehindu.com

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