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Home / Business / Indian economy officially plunges into recession

Indian economy officially plunges into recession

The gross domestic product (GDP) had contracted a record 23.9 per cent in the first quarter of 2020-21 as the coronavirus lockdown pummelled economic activity
The Indian economy has officially plunged into recession but the contraction in the economy at 7.5 per cent in the second quarter has been less than feared.

Our Special Correspondent   |   New Delhi   |   Published 28.11.20, 02:21 AM

The Indian economy has officially plunged into recession but the contraction in the economy at 7.5 per cent in the second quarter has been less than feared, generating expectations of a quick revival with manufacturing offering hope after reporting a small positive growth in the quarter.

The gross domestic product (GDP) had contracted a record 23.9 per cent in the first quarter of 2020-21 as the coronavirus lockdown pummelled economic activity. In contrast, China’s economy grew 4.9 per cent in the July-September quarter against 3.2 per cent growth in April-June.

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Even as manufacturing provided some succour, its  performance stretched over the first half of the fiscal from April to September remained a concern having reported a 19.4 per cent contraction in the first half. The figures of six months for the services sector especially the key construction and trade, hotels and transportation segments show the grind ahead particularly if the infections rise and states resort to lockdowns. The construction and trade segments shrank a massive 30.2 and 31.5 per cent, respectively, in the first half though the dip in the second quarter only was much lower, with construction shrinking 8.6 per cent and trade 15.6 per cent. 

On the demand side, government final consumption expenditure plunged 22 per cent in the second quarter, while gross fixed capital formation, which is a proxy for investment, contracted 7.35 per cent. Imports, which is another major demand indicator, have contracted 17.1 per cent in the reporting quarter.

“We should be cautiously optimistic and the caution is warranted because economic impact is primarily due to the pandemic. It is difficult to predict if positive territory can be hit in the third or fourth quarter of this fiscal,” chief economic adviser K.V. Subramanian told reporters.

Sreejith Balasubramanian, economist — fund management, IDFC AMC, said manufacturing growth was strong along with agriculture but services and construction growth was still negative. “Nominal core GVA (GVA excluding agriculture and public administration) is more reflective of private sector activity and it contracted 5.7 per cent on an annual basis.” 

Icra principal economist Aditi Nayar said she expects a stronger rebound in the second half of the fiscal. “At present, it appears GDP contraction in 2020-21 is likely to be 7-9 per cent  milder than our previous forecasts, unless rising Covid-19 infections force fresh restrictions.” 

Two straight quarters of GDP contraction mean India has fallen into technical recession — the first since the Centre began releasing quarterly estimates of GDP in 1996-97. 
Annual GDP has contracted on four previous occasions, the last in 1980-81.

Manufacturing clocked a surprise 0.6 per cent growth in July-September after it had shrunk a massive 39 per cent in the preceding quarter. Continuing its good showing, the agriculture sector grew 3.4 per cent, while the trade and services sector showed lower-than-expected contraction at 15.6 per cent.

Dharmakirti Joshi, chief economist, Crisil said “the second-quarter (Q2) GDP data has lent a positive bias to our full-year call of 9 per cent contraction. However, there are some signs of flattening of economic activity in the third quarter. “

“Hence, that and further spread of Covid-19 will remain the key monitorables. The services sector will be more vulnerable in the second half, particularly contract-based services,” the Crisil chief economist said.

The mining sector contracted 9.1% in Q2 compared to a contraction of 23.3% in the last quarter. Electricity and other public utilities grew 4.4% against a contraction of 7% in Q1. Construction contracted 8.6% in Q2 compared to a drop of 50.3% in Q1. Trade, hotel, transport, communication fell15.6% compared to a contraction of 47% in the previous quarter. The financial services sector contracted 8.1% compared to a contraction of 5.3% in the previous quarter. The public administration segment, supported by government spending, contracted 12.2% in Q2 versus a fall of 10.3% in Q1.

Dharmakirti Joshi, chief economist, Crisil said “the second-quarter (Q2) GDP data has lent a positive bias to our full-year call of 9 per cent contraction. However, there are some signs of flattening of economic activity in the third quarter. Hence, that and further spread of Covid-19 will remain the key monitorables. The services sector will be more vulnerable in the second half, particularly contract-based services.”

Private consumption, reflected in private final consumption expenditure, contracted 11.3% in Q2 compared to a drop of 26.7% in Q1. Investments, as reflected by gross fixed capital formation, contracted 7.3% compared to a fall of 47.1% in Q1. Government final consumption expenditure contracted 22.2% in Q2 after growing 16.4% in Q1.

“The government consumption expenditure has shrunk to an unprecedented level of (-)22.2%, indicating weak fiscal stimulus. Clearly, most of the enhanced government borrowing has gone to make up for the shortfall in tax and non-tax revenues leading to a contraction of (-)1.9% in centre’s capital expenditure and a small positive growth at 0.4% in its total expenditure upto the first seven months into the fiscal year. Growth momentum is expected to pick up in 3QFY21, turning strongly positive in 4QFY21,” D K Srivastava, Chief Policy Advisor, EY India said.

Reserve Bank of India (RBI) Governor Shaktikanta Das had stated that the recovery from the lockdown has been stronger than expected and the economy could show growth in the fourth quarter. The improvement in the economy came ahead of next week's interest rate decision by the RBI and coincides with a drop in India's daily virus cases, which have tapered off to half of its peak of more than 97,000 infections a day in mid-September.



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