India Q4 GDP Preview: A Hint Of The Covid-19 Pain To Come
With activity plunging in the fourth quarter, full-year growth could fall to about 4.4%.
The Indian economy is likely to have slowed sharply in the fourth quarter of FY20, reflecting the early impact of the Covid-19 pandemic. While a nationwide lockdown was only imposed on March 24, consumers and corporations had started to turn cautious from the beginning of the month.
As a result, GDP growth is expected to slow sharply to 1.5% in the fourth quarter of FY20, according to the median estimate of 28 economists polled by Bloomberg. The economy grew at 4.7% in Q3 and was seen expanding by 4.6% in the fourth quarter, going by the official advances estimates for FY20 growth.
With activity plunging in the fourth quarter, full-year growth could fall to about 4.4%.
Economic activity in the last seven days of March was completely suspended due to nation-wide lockdown. Due to this there was an estimated loss of at least Rs 1.4 lakh crore during those seven days of lockdown, said Soumya Kanti Ghosh, chief economic adviser at State Bank of India. Consequently, GDP growth in the January-March quarter would be around 1.2%, he estimated, while GDP growth for the full financial year could settle at 4.2%.
What High-Frequency Indicators Looked Like
Data compiled by BloombergQuint shows there was little to support the economy in the fourth quarter, with most high-frequency indicators, except core industrial output and PMI, seeing a sharp decline.
Exports and non-oil imports fell as the impact of Covid-19 was already ripping through the global economy. Foreign tourist arrivals also plunged. Locally, sales of automobiles, consumer durables and non-durables all dropped.
Two notable exceptions were core industrial output, which expanded by 0.7 percent in the January-March quarter compared with a decline in the previous quarter. Readings on the purchasing managers’ index also remained strong.
The two-weeks of lockdown in March is likely to have erased the gains of January and February, Pranjul Bhandari, chief India economist at HSBC, said in a report on May 27.
HSBC’s India Growth Tracker suggests that activity momentum in March contracted 50% annualised in GDP equivalent terms. For the January- March quarter, this points towards a 10% annualised sequential contraction and a 0-0.5% year-on-year GDP growth, Bhandari said.
Rahul Bajoria, chief India economist at Barclays, said the initial months of the fourth quarter saw the economy building momentum. Supportive policy measures such as corporate tax cuts, along with easing of monetary conditions started kicking in, he said. However, by mid-march, major cities such as Mumbai and Delhi saw the imposition of partial and then full lockdowns, taking a heavy toll on economic activity and sending a host of indicators plunging to unprecedented lows, Bajoria said “We expect Q4 FY20 GDP to grow at 2% annually, giving us early glimpses of the effects of lockdown.”
Key Components Of GDP
Among key components, agriculture and mining are expected to support GDP growth.
Agriculture is estimated to grow by 5% compared to 4.5% in the October-December quarter, according to a research note by Barclays. Mining is estimated to grow by 7% from 3.5% in the previous quarter.
A strong monsoon and healthy reservoir storage levels led to all-time high agricultural output during the winter season. Agricultural activities along with some mining activities were also exempt from the lockdown in March.
In contrast, manufacturing and construction are expected to see a sharp contraction even in January-March quarter, before falling to historic lows in April-June. Manufacturing is estimated to contract by 4% compared to a contraction of 3.2% in the previous quarter, according to Bajoria. Construction is expected to continue to contract by 4% as well, having fallen 0.7% last quarter, said Bajoria.
Services, too, will remain remain a drag on the economy, even though key parts, including financial services and telecommunication, continued to work through the lockdown period.
The Worst Is Yet To Come
While the January-March quarter will give a hint of the economic pain brought on by the Covid-19 crisis, its peak impact will be visible in the first quarter of FY21.
“The first quarter will suffer a staggering 25% contraction,” said Crisil Chief Economist DK Joshi in a report this week. Crisil sees the Indian economy contracting by 5 percent in FY21.
“We now believe that Q1 GDP loss will be humongous and could even exceed 40%,” said SBI’s Ghosh, who expects a full-year contraction of 6.8%.
Goldman Sachs forecasts a 45% contraction in the first quarter and 5 percent drop in real GDP for the full year.