India Plunges Into Technical Recession As GDP Contracts 7.5% In Q2FY21
Shoppers walk along a street at night in Atta Market in Noida. (Photographer: Prashanth Vishwanthan/Bloomberg)

India Plunges Into Technical Recession As GDP Contracts 7.5% In Q2FY21

The Indian economy contracted for the second straight quarter, albeit at a slower pace, as restrictions to curb the spread of Covid-19 were eased and economic activity resumed.

India’s real GDP fell to 7.5% in the July-September quarter compared to a contraction of 23.9% in the three months ended June, showed data released by the Ministry of Statistics and Programme Implementation on Friday. GDP at current prices was estimated at Rs 47.22 lakh crore, showing a contraction of 4.0 percent.

In gross value added terms, the economy contracted 7% compared to a contraction of 22.8% last quarter.

A Bloomberg poll of 30 economists had forecast India’s GDP to contract 8.2% in the July-September quarter, while GVA was estimated to contract 7.6%.

Two straight quarters of GDP contraction mean that India is has fallen into a technical recession — the first since India began releasing quarterly estimates of GDP in FY98. Annual GDP has contracted on four previous occasions with the last one in FY80.

Pronab Sen, former chief statistician of India said that GDP in the second quarter was expected to look better because of the festive season and pent-up demand. While that has happened, there is a chance that the third quarter could look worse as this impact will wear off, Sen cautioned.

Today’s estimate, while in the expected range, is still a bad figure, said Kaushik Das, chief India economist at Deutsche Bank. Das is less pessimistic than Sen about the third quarter expects the Indian economy to contract by 7-8% in the current financial year.

Das also cautioned that while growth rates will start to look better, the level of GDP remains well below pre-Covid times.

While things may start to look better on a year-on-year basis, if we are lucky, the Indian economy will go back to its December 2019 levels of GDP by the end of 2021. Covid-19 has taken back the economy by about two years and growth will restart only from 2022. 
Kaushik Das, Chief India Economist, Deutsche Bank 

Expenditure Trends

  • 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 contraction in government expenditure is a shock as it comes despite the central government’s announcement of numerous packages, said Sen, commenting on expenditure trends. The improvement in private investment is a reflection of ongoing projects that were held up restarting, but “the real question is whether new investments are being manifested.”

A clearer trend on private consumption will only be visible in the coming quarters, Sen said. “In the first two quarters, even those who have suffered a loss in income will try to maintain consumption by drawing into savings. If expectations of income streams coming back start receding, then they will lower living standards sequentially.”

Sectoral Trends

  • Agriculture grew at 3.4% in Q2 compared to 3.4% in Q1.
  • The mining sector contracted 9.1% in Q2 compared to a contraction of 23.3% in the last quarter.
  • Manufacturing grew 0.6% in Q2 after a fall of 39.3% in the preceding 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.

Outlook

The modest upward surprise suggests that a robust rural sector and fiscal transfers have supported the Indian economy, said Rahul Bajoria, chief India economist at Barclays.

While manufacturing production is showing a strong recovery for now, output is close to near-term highs, so we expect the strength here to likely moderate in the coming months, as inventory replenishment is likely over. However, the services sector should be next in line to recover, with several areas already reporting higher activity, notwithstanding increased Covid-19 cases in some parts of the country.   
Rahul Bajoria, Chief India Economist, Barclays

There were four drivers for the better than expected second quarter GDP, said DK Joshi, chief economist at CRISIL. These are pent-up demand; support from agriculture and select export sectors; cost savings for corporates; and a ‘learning to live’ attitude.

“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,” he said. Despite this, the second half can see better growth performance and higher government revenue, both of which can support spending, Joshi added.

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