India Q2 GDP Preview: A Slow Climb After A Great Fall
A climber attempts an ascent of Trump Tower in New York, U.S., Wednesday, Aug. 10, 2016. (Photograph: Victor J. Blue/Bloomberg)

India Q2 GDP Preview: A Slow Climb After A Great Fall

India will enter a technical recession this week with the economy set to contract for a second consecutive quarter. The pace of contraction, though, is likely to be significantly below what was seen in the first quarter of the year. GDP data for the July-September quarter is due to be released on Friday.

India’s GDP contracted by a record 23.9% in the April-June quarter when a nationwide lockdown brought vast swaths of the economy to a halt. Even though economic activity picked up in the July-September quarter, a contraction in GDP is inevitable.

According to median estimates of 30 economists polled by Bloomberg, GDP is estimated to contract by 8.2% in the second quarter, while gross value added is expected to contract by 7.6%. A nowcasting model of the Reserve Bank of India has forecast a fall of 8.6% in second-quarter GDP.

With the second consecutive quarter of contraction, India would enter its fourth recession since independence and the first since liberalisation, according to data from CRISIL.

The GDP data, however, is backward looking and what economists will be watching for is an improvement in activity between the first and second quarters.

The recovery in activity in Q2 FY21 is likely broad-based, according to Rahul Bajoria, chief India economist at Barclays, who estimates GDP will contract by 8.5%.

While the farm sector remained the bright spot, supported by a good monsoon season and subsidised inputs, the recovery likely spread wider across the economy and is on the verge of becoming entrenched. 
Rahul Bajoria, Chief India Economist, Barclays

Soumya Kanti Ghosh, group chief economic advisor at the State Bank of India forecasts a steeper 10.7% fall in Q2 GDP.

“It is true that economic activities gained momentum in Q2 as compared to Q1. Despite this, we still believe that Q2 GDP contraction will be in double digits as the recovery was patchy in sectors like mining, manufacturing, construction and services related to trade, hotels and transport,” said Ghosh.

High-Frequency Indicators

High frequency indicators compiled by BloombergQuint all rose from the historic lows hit during the April-June period, but remained significantly below pre-Covid levels.

The decline in exports eased significantly and outbound shipments returned to positive growth by the end of the quarter. Imports took longer to revive because of weak domestic demand.

The Purchasing Managers’ Indices for manufacturing and services improved, with the former pointing to expansion in manufacturing in September. Services activity contracted through the quarter, the PMI data showed.

The eight core industries continued to contract albeit at a decelerating pace, but output of consumer durables and non-durable goods picked-up by quarter end.

India Q2 GDP Preview: A Slow Climb After A Great Fall

Key Components Of GDP

Among key sectors, agriculture, forestry and fishing is expected to be the only sector to grow. ICRA estimates a growth rate of 3%.

A substantial recovery in manufacturing and construction is likely to underpin the expected improvement in the performance of the industrial GVA for the quarter, said Aditi Nayar, principal economist at ICRA, who forecasts manufacturing GVA to contract by 10%.

Construction activity picked up pace but Barclays still expects the sector to contract 7%. Trade and commerce is estimated to see the sharpest fall, contracting by 30%, the research house forecasts. The sector remained under restrictions because of its contact intensive nature.

While the government continued to spend in certain segments to support the economy, weaker revenues meant that overall spending did not rise significantly.

“We fear that the shrinkage in government spending may have capped the pace of the economic recovery in Q2 FY21. However, the performance of other services, such as education, health etc. would have revived, relative to the situation during the lockdown,” Nayar said.

Also read: India’s Economic Scorecard Improves As GDP Estimates Revised Higher

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