Economists agree on massive GDP contraction, differ widely on the extent

At the lower end of the estimate band is India Ratings' 13.6% and at the upper, Pronab Sen predicts a maximum shrink of 35%

Economists and various agencies have pegged the contraction in gross domestic product (GDP) in the range of 13.6-35 per cent in the first quarter of 2020-21. The National Statistics Office (NSO) is slated to release the official number at the end of the current month. 

Former chief statistician Pronab Sen has projected the GDP fall to be 25-35 per cent for the first three months of the year. 

When reminded that the last crucial macro economic data, the index of industrial production (IIP), showed sharp deceleration in contraction at 16.6 per cent in June, from 33.8 per cent in May and a record 57.6 per cent slide in April, Sen said the crucial element in the pack is the services sector, about which there is little information. 

"Agriculture we know has done well, it is likely to show a growth of about 3.5 per cent in Q1. Industry we know has done badly, it may show 60-70 per cent contraction. But services we don't know. That is the big baby," he said. 

IIP shrank 35.9 per cent in the first quarter of FY21 year-on-year. 

The IHS purchasing managers' index (PMI) for services remained contracted, despite rising to 33.7 in June, from 12.6 in May and just 5.4 in April. In PMI parlance, a reading above 50 indicates expansion, and anything below that threshold indicates contraction.

Credit rating agency Icra projected the economy to have shrunk by a sharp 25 per cent in the first quarter of the year. The agency now expects a shallower recovery in the subsequent quarters, with a contraction of 12.4 per cent in Q2, against an earlier forecast of 2.1 per cent, and a fall of 2.3 per cent in Q3 against a previous estimate of 2.1 per cent. This, its says, will be followed by an 'anaemic' growth of 1.3 per cent in the fourth quarter against five per cent estimated earlier.

Icra principal economist Aditi Nayar projected the economy to decline by 9.5 per cent in 2020-21. She had earlier pegged economic contraction at five per cent for the year, but revised the projections after a spike in Covid-19 infections caused a spate of localised lockdowns in some states and cities, and arrested the nascent recovery that had set in during May and June.

Devendra Pant, chief economist at India Ratings, said the economy may have shrunk 13.6 per cent in Q1 of FY21. 

He pegged economic decline at 5.3 per cent for the whole year. "Our assessment tells us that all four quarters will have negative growth," Pant said. 

The India Ratings chief economist said deceleration of IIP contraction in June was expected. 

"IIP is only (about) the corporate sector. It constitutes just 22.4 per cent of GVA. If one assesses how services are behaving, if one looks at PMI, first quarter will be a dip," he said. 

SBI group chief eocnomic advisor Soumya Kanti Ghosh assessed that GDP may have fallen by 16.5 per cent in Q1 of the current financial year against an earlier projection of over 30 per cent. He said degrowth in corporate gross value added (GVA) is significantly better than revenue degrowth in Q1FY21 as far as the results of the listed companies are concerned. 

In principle, revenue decline in listed companies has been far outstripped by cost rationalisation, due to which margins have not been impacted, he said. However, rural recovery is unlikely to support such pace in subsequent quarters as overall, the per capita monthly expenditure in urban areas is at least 1.8 times the rural areas and rural wage growth in real terms might still be negative. 

This indicates that rural recovery will not have much impact on GDP growth. Therefore, it is of utmost importance to unveil further steps to support growth, Ghosh said.

He said the virus has significantly penetrated rural areas in July and August. The percentage of cases in rural districts to total new cases has risen to 54 per cent in August. 

Also, the number of rural districts with less than 10 cases has reduced significantly. Andhra Pradesh and Maharashtra have been impacted more severely with increasing penetration in rural areas. 

These districts contribute 2-4 per cent to the GSDPs of their respective States, indicating that cases are penetrating deeper into the rural hinterlands.

CARE Ratings chief economist Madan Sabnavis said GDP may contract by 20.2 per cent in the first quarter. "Notwithstanding the fact that considerable uncertainty prevails regarding the quarterly economic performance, taking cognizance of the adverse impact of lockdown we are pegging the real GDP growth at (-) 20% YoY for Q1 FY21," he said.

Nomura in a recent note expected GDP to shrink by 15.2 per cent in the first quarter of 2020-21.

Barclays pegged GDP fall at 25.5 per cent during April-June period of 2020-21. It also lowered its forecast on the decline in the economy to six per cent from 3.2 per cent for FY21 earlier.

BofA Securities projected the fall in the first quarter to have been 20 per cent. 

Economic growth had started slowing down even before Coronavirus had struck India, falling to 3.1 per cent — a low not seen in more than 17 years — in the fourth quarter of 2019-20, with private investment and manufacturing hit hard even as there was the Covid-19 lockdown for only a few days in March.

This pulled down gross domestic product (GDP) growth to an 11-year low of 4.2 per cent in 2019-20. This was lower than the government projection of 5 per cent in both, the first and the second advance estimates. Growth had stood at 6.1 per cent in the previous year. 

Table: GDP contraction as projected by various agencies and economists for the first quarter of FY21

Agency/economist	Estimate
India Ratings	13.6%
Nomura	15.2%
SBI Research	16.5%
CARE Ratings	20.2%
BofA Securities	20%
Icra	25%
Barclays	25.5%
Pronab Sen	25-35%

Source: Respective agencies and economists