Q1 GDP numbers show economic outlook fraught with uncertainty

Indian GDP will de-grow in both Q2 FY2021 and Q3 FY2021 but pace of contraction may narrow, writes Aditi Nayar.

The impact of the Covid-19 health crisis and the associated lockdowns on the economy had been awaited with bated breath by economists and non-economists alike. The National Statistical Office (NSO) has now published its initial estimates for the April – June 2020 quarter of the fiscal 2020-21 (Q1FY21), which peg the year-on-year (YoY) contraction in GDP and GVA at 2011-12 prices at a historic low 23.9 per cent and 22.8 per cent, respectively, similar to our forecast of a 25 per cent shrinkage in Indian economic activity during the lockdown quarter.

On the production side, construction, manufacturing and trade, hotels, transport, communication and services related to broadcasting, which together account for 45 per cent of the economy, were acutely affected by the lockdown in Q1 FY2021, in line with our expectations. For instance, the halt in activity for 20 days in April 2020 as well as the uneven recovery thereafter, resulted in the GVA of construction halving in Q1 FY2021. Driven by the three aforementioned sub-sectors, industry and services recorded eye-watering de-growth of 38.1 per cent and 20.6 per cent, respectively, in that quarter.

Surprisingly, public administration, defense and other services also posted a contraction of 10.3 per cent in Q1 FY2021, despite the sharp growth in government spending. The less affected sectors include electricity, gas, water supply and other utilities, and financial, real estate and professional services, which escaped with just single-digit de-growth in that quarter.

Agriculture, which benefitted from the record-high Rabi harvest for many crops, recorded a rise of 3.4 per cent in Q1FY21, broadly unaffected by the lockdown.

On the expenditure side, gross fixed capital formation shrunk by a steep 47.1 per cent in Q1FY21, with investment activity as well as project announcements getting bruised by the pandemic, even as government capital spending grew on a small base.

Moreover, private final consumption expenditure contracted by as much as 26.7 per cent in during the period under review, with economic uncertainty, income and job losses, and shriveled up remittances, curtailing disposable incomes, consumer sentiment and expenditure.

In sharp contrast, government final consumption expenditure recorded a five-quarter high expansion of 16.4 per cent in the April – June 2021 quarter, preventing an even deeper plunge in the overall GDP. Excluding Government consumption spending, balance GDP contracted by nearly 30 per cent in during the April – June 2021 quarter, highlighting the extent of the distress during the Covid-19 crisis.

With Covid-19 infections continuing to climb, especially outside the major urban centres, and some states extending local lockdowns further, the economic outlook remains fraught with uncertainty. We expect consumption trends to remain altered by the pandemic, with non-discretionary and in-home consumption being prioritised at the expense of discretionary goods and services, especially where social distancing is difficult to maintain. A broad-based pick up in investment activity is likely to be back-ended to at least H2 FY2022. Moreover, the revenue shock being faced by all levels of government may constrain their ability to support the recovery.

We remain cautiously optimistic that the monsoon, reservoir and Kharif sowing situation can support a 3-3.5 per cent agricultural growth in FY2021. Regardless, we continue to expect regional and sectoral unevenness in the pace of recovery of the non-agricultural sectors going forward.

Our assessment is that Indian GDP (at constant 2011-12 prices) will de-grow in both Q2 FY2021 and Q3 FY2021, although the pace of the contraction may narrow. We are cautiously hopeful that the economy may be able to eke out a marginal growth in Q4 FY2021, benefitting from the base effect related to the last fiscal, although this remains contingent on how soon the Covid-19 infections can be brought under control. As of now, we maintain our forecast that the Indian economy will contract by a sobering 9.5 per cent in FY2021.

Aditi Nayar is Principal Economist at ICRA. Views are her own.