In one of the worst performances, India's gross domestic product (GDP) that contracted 23.9 per cent in the first quarter (April-June quarter) of the current financial year indicates that the path of economic recovery appears to be a long and hard one. Economic experts feel that a mix of monetary and fiscal measures to prop up the economy has fallen short so far. Innovative thinking on the part of the government and the RBI is imperative and some good providence are required to turn the tide quickly.
Whether it is private consumption or capital formation, the numbers are hugely negative and would require more action from the government. Though the government’s fiscal position does not leave much room for further action, the core sector numbers, too, indicate nothing different regarding the state of the Indian economy. Economists feel that a demand or consumption-led recovery is crucial for the economy and it may require measures by which the disposable income of people is enhanced.
The worst ever fall in the GDP growth figure is the direct consequence of the pandemic and the lockdown. “Even with some improvement in the economic variables in the coming three quarters, the growth for the whole year would be around -5 per cent or slightly higher for the whole year. The probability of this number being revised is quite high given the fact that there have been practical difficulties around data collection and estimation on manufacturing and industries, and consumer prices. Except for agriculture across sectors, others including services, manufacturing, trade, etc have shown an unprecedented fall,” remarked Joseph Thomas, head of research-Emkay Wealth Management.
The numbers indicate that the trough in the economy was much lower than expected and the pick-up will likely be more elongated. Production side was pulled down by deep contraction in manufacturing, construction and trade, hotel and transport sectors, while the expenditure side was clearly pushed lower by heavy contraction both in consumption and investment. Going forward, given the gradual improvement in activity indicators (remaining well below pre-COVID levels) the growth recovery will be gradual and contracting for all quarters in FY21.
“Growth recovery will also be hinged to the curb of the Covid-19 spread and removal of even localised lockdowns. The choice for the government will be on whether the consumption or the investment side needs to be pushed. Given the limited fiscal space and the need to stimulate a more durable growth, the growth recovery will be gradual and is likely to continue into the first half of FY22,” observed Suvodeep Rakshit, vice president and senior economist at Kotak Institutional Equities.
The June quarter GDP number came in worse than most estimates as widespread and repeated lockdowns have resulted in this sharp fall. Construction contracting 50.3 per cent and trade, hotel, transport and communication contracting 47 per cent are the two negative surprises. Investments, too, contracted 47.1 per cent. The numbers being slightly worse than expected could impact the market sentiments mildly. Economists feel that the RBI also cannot do much beyond what it has already done. At this juncture the government has to spur consumption by taking fiscal measures, where the RBI may come in to help for smoothening the fund-raise programme.
“The GDP numbers could upset the government’s fiscal math that may force major changes in the public finance estimates. Now, the focus will shift to the September quarter. Going by the July core infra number of 9.6 per cent, the September quarter may also record high single digit decline in GDP on a year-on-year basis. While the rural economy has offset the slowdown in urban areas in the first quarter to some extent, rural recovery is unlikely to support such pace in subsequent quarters. One reason for this is that COVID-19 has started to penetrate rural areas at a faster pace since July,” pointed out Deepak Jasani, head of retail research, HDFC Securities.
Interestingly, the agriculture sector, as expected, acted as a saviour with 3.4 per cent growth in the first quarter. This growth is largely attributed to normal rainfall and resilient rural economic activity and is expected to provide support in the rest of the fiscal. Both the industrial and services sectors have been hit the hardest. Almost all the major sub-sectors reported a contraction, with construction activities, manufacturing sector and trade, hotels and transport in the services sector being hit the worst in the first quarter.
In the services sector, even public administration showed a sharp contraction of 10.3 per cent, compared with 7.3 per cent positive growth in the first quarter of the last fiscal. The contraction in some services is large and as these continue to be under restricted functioning, the improvement in the coming quarters will be staggered.
“The economy has certainly entered a recession phase as the second quarter GDP is also most likely to be negative, although the pace of contraction may be lower in the second quarter than in the first due to the lower base which will wane to some extent, and the gradual lifting of the lockdown in areas and sectors, which is likely to improve economic activity. Some early indicators such as eight core sectors and the manufacturing PMI are showing early signs of a resumption in activities. We expect the FY21 Q2 GDP to be in the range of minus 10-15 per cent,” said M. Govinda Rao, chief economic advisor, Brickwork Ratings.
For some experts, the contraction of GDP numbers for the first quarter of FY21 was on expected lines due to the prolonged lockdowns and a slump in economic activity along with a steady drop in consumption, a fact that had been reiterated by the RBI repeatedly. While the majority of economic activity has restarted with ‘Unlock 4’, the steady rise in caseloads and the spillover effects of the strict lockdown measures will continue to undermine the growth impulses during the subsequent quarters of the year.
“Survey results reveal the scenario to be not so optimistic for the second quarter of FY21. Further, in July 2020, the energy requirement for the top seven states, with the highest number of confirmed cases, except for UP, remained far below their 3-year average level, indicating the subdued pace of economic activity in Q2 FY21 as well. Without a reduction in the number of cases, the festivities, which usually lends a buoyancy to the growth momentum, will also remain subdued. This will pull down overall growth. Constrained government finances, contraction in investment activity, probable defaults both at firm and consumer levels and bankruptcies will continue to be a drag on GDP growth in FY21,” said Arun Singh, Global Chief Economist, Dun and Bradstreet.
