India’s economy shrinks record 23.9% y/y in first quarter

A worker wearing a protective face mask works on a loom in a textile factory, amidst the coronavirus disease (COVID-19) outbreak, in Meerut, July 7, 2020. (Reuters)

BENGALURU: India’s economy contracted at its steepest pace of 23.9% in the June quarter as the pandemic lockdown dented consumer and business spending, putting pressure on the government and central bank for further stimulus and a rate cut.
The gross domestic product (GDP) data released on Monday showed consumer spending, private investments and exports all collapsed during the world’s strictest lockdown imposed in late March to combat the COVID-19 pandemic.
A Reuters poll of economists had forecast that gross domestic product in world’s fifth-largest economy will contract by 18.3% in the June quarter, compared with 3.1% growth in the previous quarter, the worst performance in at least eight years.
COMMENTARY
ADITI NAYAR, PRINCIPAL ECONOMIST, ICRA, GURUGRAM “The GDP and GVA plunged precipitously in the lockdown-ridden Q1 of FY2021, both printing similar to our forecast of a 25% contraction. Moreover, incoming data on the MSME and less-formal sectors could manifest in a deeper contraction when revised data is released subsequently. We maintain our forecast that the Indian economy will contract by 9.5% in FY2021.
“The wide discrepancy between the double-digit growth of the government’s final consumption expenditure and the contraction in public administration, defense and other services on the production side, is rather incongruous.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI “Real GDP growth at (-)23.9% in 1QFY21 was much lower than what the markets were expecting. 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 1HFY22.”
MADHAVI ARORA, LEAD ECONOMIST, FX AND RATES, EDELWEISS SECURITIES, MUMBAI “The Q1 GDP growth print came in worse than our expectations of -18%. The surprise take-away elements were the better-than-expected performance of finance and real estate sector, and more pertinently, a sharp contraction in public administration (proxy for government spending) data. Nonetheless, it does little to change the broad contours of the growth trajectory.
“The sub-optimal policy response would only mean the downward cycle could stretch further, while structural constraints limit sustained secular growth pick-up ahead. We think the government will have to loosen its fiscal strings further in 2HFY21 if growth prospects remain weak.”
SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM
“Given the lack of reporting due to the lockdown in Q1 (especially for the informal sector), we expect the GDP numbers to be revised down further in subsequent releases. Excluding agriculture, GVA actually contracted by -27% in Q1.
“Hopes of an economic recovery in the second half of the year have been pinned on a rural sector revival. However, with the virus spreading to the hinterland, the rural support might be lower than expected.
“In terms of the growth prints, Q1 is likely to be the worst print and it will be a very slow grind up from this bottom going forward. We continue to expect a -7.5% growth print for the year with a downward bias to our forecast.”
RAJANI SINHA, CHIEF ECONOMIST, KNIGHT FRANK INDIA,MUMBAI “The sharp fall in the first-quarter GDP is on expected lines, given that around 70-80% of the economy was on a standstill in the first two months of this quarter.
“As expected, Private Final Consumption Expenditure and Investments have contracted sharply in this quarter, while the positive agriculture growth has been the silver lining.
“With the economy unlocking in the last few months, most economic parameters have improved to 70-90% level of the corresponding period of last year. However, a sustainable recovery would depend on the time taken to contain the spread of virus. Increased infrastructure investment by the government and demand-boosting measures are much required for the economy to recover.”
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
“This kind of a decline was expected as there was a lockdown for roughly half of the quarter. Monday’s infrastructure data showed the decline was less than 10% and with the exception of cement and steel, all other sectors have done reasonably well.
“The Reserve Bank of India (RBI) won’t lose too much sleep on this number as it was expected. The RBI still has its focus on growth. This (GDP number) slightly improves chances of a rate cut in October. Unless the inflation comes below 5% in the next reading, the RBI still might postpone the rate cut to December.”
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
“Contraction of real GDP at 23.9% appears to be underestimated, as data collection efforts were hit by the pandemic.
“The NSO had to use substitutes and proxies to estimate the losses of informal sector. So there is a very high probability that this data will undergo several revisions in the future. But broader trends are clearly visible.
“Unless the Central and state governments focus on re-starting the economic machine completely, the real process of repair and reconstruction will not gain momentum. Unless this is given the top-most priority, India will get trapped with the unsustainable debt burden.” UPASNA BHARDWAJ, SENIOR ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI “After a record contraction in Q1, we expect the following quarters to normalize registering a much slower fall. The high-frequency data since June has been suggesting a significant pickup in activity. Nonetheless, the weakness in demand is expected to weigh across all sectors and some policy support will be necessary to cushion any further deterioration.
“We expect some kind of stimulus from the government in the coming few months. The recent policy measures from the RBI will help cap any sharp upside risks to bond yields in case of any incremental supply.” SIDDHARTHA SANYAL, CHIEF ECONOMIST AND HEAD OF RESEARCH, BANDHAN BANK, KOLKATA “The GDP contraction of close to 24% y/y during Q1 FY21 was clearly sharper than expected. Also, given the lack of clarity about whether the disruption in informal sector activities were captured adequately, the possibility of further worsening of Q1 FY21 GDP estimate during subsequent rounds of revisions cannot be ruled out. Overall, GDP looks set to record near double-digit contraction during FY21.
“However, rural activities seem to be relatively more resilient at the moment and might benefit from the government’s rural-focused employment schemes. Given the recent uptick in CPI prints, it seems that the RBI may not be in a position to cut rates in the near-future, even though one expects more rate cuts during and/or after the December MPC.”