The Indian economy contracted 7.5% in the second quarter of 2020-21, better than most analysts expected, although the touch of gray to this ray of light was provided by the fact that, with the second Consecutive quarterly drop, technically in recession, as a result of the long-lasting effect of the 68-day lockdown imposed to curb the coronavirus disease, and some persistent restrictions.
A Reuters poll of economists had projected a contraction of 8.8% in the September quarter from a year earlier. The 7.5% drop is a sharp improvement over the 23.9% contraction seen by the economy in the previous quarter, although much of India spent two full months of that period almost completely under lockdown. The recession is India’s first in at least 24 years.
“I would say that we must be cautiously optimistic and the caution is justified because the economic impact that we are seeing (in the June-September quarter) is mainly due to the pandemic,” said Chief Economic Advisor Krishnamurthy Subramanian commenting on the situation. economical. panorama. “While we have crossed the peak of the first wave in September, the winter months should warrant caution.” He noted that the second wave of Spanish flu in the early 20th century was worse than the first.
The Finance Ministry said in a series of tweets that the number “reinforces the recovery as reflected in several high-frequency indicators” and noted the high index of purchasing managers for manufacturing (a measure of manufacturing activity) and services. , positive factory output and a “V-shaped recovery in … consumer goods, especially consumer durables, and investment, especially capital goods and infrastructure.”
Experts are divided on the growth trajectory in the second half of the fiscal year. Speaking to Bloomberg Quint, India’s former head of statistics Pranab Sen said that he expects the third-quarter figures to deteriorate once again.
The second quarter was unusually fortunate to have tailwinds both due to suppressed demand due to the shutdown and the upcoming holiday season. These factors will not be there in the third quarter, he said. The fact that the index of the eight industries of the main sector suffered a greater contraction of 2.5% in October compared to 0.8% in September supports this view.
Part of the improvement in the second quarter and beyond could also be the result of a favorable base effect, as India’s GDP growth had been falling even before the pandemic broke out.
Another cause for concern regarding the economy is the drop in public spending, which has worsened compared to the June quarter. This suggests a pro-cyclical fiscal stance at a time when there have been widespread demands for greater fiscal stimulus. The Indian economy is expected to contract 9.1% in the current fiscal year, according to the RBI.
To be sure, the pace of the sequential recovery varies across sectors and the service sector, which accounts for more than half of India’s GDP, remains the worst hit. Industrial production has proven to be the most resilient and the gross value added (GVA) component of the manufacturing industry posted positive growth in the September quarter. This is the first time since September 2019.
The construction and commerce, hotels and restaurants sectors, which together employ more than 20% of India’s workers, contracted 8.6% and 15.6%, respectively.
Agricultural performance has been consistent with growth of 3.4% in both the June and September quarters.
The latest figures also suggest that the improvement from June to September is in spite and not because of public spending. Both components of public spending in the GDP and GVA figures; The Government Final Consumption Expenditure (GFCE) in GDP and Public Administrations, Defense and Other Services in GVA, in fact, have worsened between the June and September quarter. The GFCE grew 16.4% annually in the June quarter. It has contracted 22.2% in the September quarter. The Public Administration, Defense and Other Services component of the GVA contracted at a rate greater than 12.2% in the September quarter compared to 10.3% in the June quarter.
In contrast, both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF), which measures investment, registered an improvement. The PFCE contracted 11.3% in the September quarter compared to 26.7% in the June quarter. In the case of GFCF, the improvement went from a 47.1% contraction in the June quarter to a 7.4% contraction in the September quarter.
A comparison of GDP figures for the September quarter with other major economies shows that while India is not the worst performing country, unlike in the June quarter, the UK GDP contracted 9.6% during this quarter. period, it still lags behind other major economies.
Statistics from the Comptroller General of Accounts (CGA), which reports to the Ministry of Finance, suggest that the central government has been withholding spending to even match what was committed in the last budget.
The deficit is larger for capital spending, which is more important for long-term growth. The central government has spent only 55.7% and 47.9% of the budgeted capital income and expenditures through October this year. These figures were 59.4% and 59.5%, respectively, in October 2019. The main reason for a contraction in the Center’s spending could be a revenue shortfall. Revenue revenue through October 2020 was only 34.2% of budget targets compared to 46.2% in the same period last year. The fact that nominal GDP growth has recovered at a much faster rate than real growth; from a contraction of 22.6% in the June quarter to a contraction of just 4% in the September quarter, it may create some cushion for the income situation, as taxes are a fraction of nominal income.
But some analysts see an upward bias in current GDP figures.
“The positive growth in manufacturing, therefore, has been a surprise, which goes hand in hand with the negative growth of the Industrial Production Index in the real sector. Since value added is used for the organized sector, there was an upward bias in the estimate, ”said a note from Madan Sabnavis, chief economist at CARE Ratings.
Companies expect the economic situation to improve in the future. “We are confident that this trend will continue and the third quarter figures will reflect that,” said Chandrajit Banerjee, director general of the Confederation of Indian Industries, in a statement.
The demand for a greater fiscal boost certainly continues. “An increase in public spending would help this push for more robust growth in the coming months,” Banerjee added.
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