India Q1 GDP Preview: Shutdown And Restart Mode

What happens when an entire economy is forced to shut down and restart? The GDP figures scheduled to be released on Monday will confirm the extent of the damage inflicted on the Indian economy by the pandemic and the consequent lockdown in the quarter ended June.

The supply and demand of all non-essential goods and services was at a near halt during the lockdown in April and parts of May. As a result, gross domestic product is expected to contract by 19.2% in April-June 2020, according to the median estimate of 15 economists polled by Bloomberg.

Gross value added growth is expected to see an even sharper contraction of 19.8%, according to a poll of 13 economists. The 3% economic growth estimate for January-March is also likely to see a downward revision.

Economist estimates for April-June GDP have shown a wide deviation, ranging from a contraction of 25.9% by Gaurav Kapur, chief economist at IndusInd Bank, to a more modest contraction of 15%, according to estimates by Shilan Shah, senior India economist at Capital Economics.

“We expect to see a broad-based decline, confirming that the extended lockdowns have driven an unparalleled blow to the Indian economy,” said Rahul Bajoria, chief India economist at Barclays. According to Bajoria, the Indian economy could contract by 25.5% in the first quarter of FY21.

Other economists are more optimistic. Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, who had earlier indicated that the decline in the economy could exceed 30%, now pegs the contraction at around 16.5%.

“This is led by better-than-expected results of some financial and non-financial companies,” said Ghosh. “Revenue decline of listed companies has been far outstripped by cost rationalisation, thereby not impacting margins.”

The first quarter estimates are based on agricultural production, the Index of Industrial Production, monthly accounts of union and state government expenditure, non-GST revenue and GST revenue, performance of the corporate sector and the performance of other sectors such as the transport, banking and insurance sectors.

The absence of informal sector data could result in some overestimation, while higher value added may not necessarily bump up growth, cautioned Pranjul Bhandari, chief India economist at HSBC. As such, GDP could contract by 17.5% in the April-June quarter, which could subsequently be revised to a 25% contraction when the informal sector survey is available, Bhandari said.

What High-Frequency Indicators Looked Like

Data compiled by BloombergQuint show high frequency indicators at historic lows in the first quarter. While the economy was worst hit in April, these indicators suggested a rebound in May and showed further signs of a pick-up in June.

Domestic auto sales fell to a fourth of that recorded in April-June 2019, when they had also contracted year-on-year. Other high-frequency indicators such as exports and consumer non-durables have shown signs of a reversal in trend. Production of consumer non-durables grew 14% on an annual basis in June. But it was the sole item to exhibit growth among all industrial products in the IIP.

By and large, most high-frequency indicators are yet to revert to pre-Covid levels even in August, with several showing signs of a stalling recovery as the pandemic continues to spread across the country.

Amid the pandemic, unemployment averaged 19.3% in the April-June quarter, according to the Centre for Monitoring the Indian Economy. The unemployment rate climbed to over 23% in April and May, indicating that as much as a fourth of India’s workforce found itself jobless then. However, the indicator dropped close to pre-Covid levels, coming in at 11% in June, as the restrictions imposed on economic activity were lifted.

The Google mobility trend, a widely tracked indicator amid the pandemic, saw a pickup in June 2020 from its levels in April and May, but remains considerably lower to the pre-pandemic levels.

Key Components Of GDP

Among key sectors, agriculture, along with public administration, are likely to support GDP growth, according to Barclays’ Bajoria. SBI’s Ghosh, however, expects growth in electricity, gas, water supply and other utility services.

Even sector-wise estimates show a wide deviation among economists. Agriculture is estimated to grow 3% in April-June compared with 5.9% in the January-March quarter, according to Barclays. Ghosh estimates the agriculture sector to grow 9% on an annual basis during the quarter.

Lower case load, quicker return to normalisation in rural regions, combined with normal rainfall and a largely rural-focused fiscal package has helped the rural sector, Bajoria said.

In contrast, mining, manufacturing and construction could see sharp contractions in the April-June quarter after already having contracted in the previous quarter. The contraction in manufacturing could range between 35-45%, according to their estimates. Bajoria expects construction to be the hardest-hit, falling to half it’s output, while Ghosh estimates the mining sector to see the sharpest contraction at 57.2% during the quarter.

The manufacturing sector has been hit harder than the services sector as restrictions brought the already slowing manufacturing to an almost complete halt. Labour issues faced by manufacturers slowed down production after factories were allowed to reopen, said Bajoria.

Trade and commerce, too, will contract, with tourism and hospitality having borne a disproportionately large brunt of the pandemic.

Public administration is likely to continue to hold up the economy and could grow between 5% and 15% in the April-June quarter, according to estimates by Bajoria and Ghosh.

Growth in government consumption will be unable to cushion a near washout in almost all other expenditure segments, said Bajoria. Both consumption and capex are expected to contract, Bajoria added.

The RBI, too, in it’s annual report published on Tuesday said "the shock to consumption is severe, and will take quite some time to mend and regain the pre-Covid-19 momentum". Private consumption has lost its discretionary elements across the board, it said, adding behavioural restraints may prevent normalisation of demand for these activities. “Even when private consumption does take hold, non-discretionary spending will lead recovery until a durable increase in disposable incomes enables discretionary spending to catch up."

Declining capacity utilisation, weakening consumption demand and the overhang of stressed balance sheets are restraining new investments, the central bank has said, stressing on the need for more reforms.

While it refrained from estimating the contraction in the economy, economic activity will reach its trough in the April-June quarter and recover thereafter, albeit at a gradual pace, with growth turning positive from the January-March 2021 quarter.