Economy

GDP contracts by record 23.9% in Q1

The Indian economy saw its worst contraction in decades, with Gross Domestic Product (GDP) shrinking by a record 23.9% in the April to June quarter in comparison to the same period last year, according to data released by the National Statistical Office on Monday

The contraction reflects the severe impact of the COVID-19 lockdown, which halted most economic activities, as well as the slowdown trend of the economy even pre-COVID-19. Economists expect this to contribute to a contraction in annual GDP this year, which may be the worst in the history of independent India.

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“The Indian economy is in a deeply vicious cycle, where demand is contracting so heavily, while the capacity to neutralise this contraction has also contracted equally because of the tax revenue contraction. Therefore, I don’t see GDP returning to positive territory for six quarters, until the second quarter of next year,” said D. K. Srivastava, chief economist at Ernst and Young, and a Member of the Advisory Council to the 15th Finance Commission. 

He expects annual GDP to contract 5%-7% in 2020-21, noting that the last contraction of the economy occurred in 1979-80, when GDP shrank 5.2%. There have been four other instances of minor contraction between 1965-68, and 1972-73, but this year is likely to be the worst since Independence, said Dr. Srivastava.

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Agriculture was the only sector which recorded modest growth of 3.4% in year on year terms. All other sectors saw contraction, with the steepest fall coming from the 50% in construction, and 47% fall in trade, hotels, transport and communication. Manufacturing shrank more than 39%, while mining and quarrying dropped 23%.

On the expenditure side, private consumption fell 26.7%, while investments, as reflected by gross fixed capital formation plunged 47%, and exports contracted almost 20%. Government final consumption expenditure grew 16.4%.

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“The major burden on the economy is the contraction you are seeing in private final consumption, which has a weight of almost 60% in the GDP. If 60% of demand is growing negatively, the task is formidable, because unless this is turned around, nothing will happen,” said Dr. Srivastava, adding that the real situation may be somewhat worse as three-fourths of the economy is in the informal sector, which is largely not captured in GDP data.

“The investment outlook is very bleak and may fall further. Consumption indicators are improving sequentially, but continue not on a year on year basis,” said D.K. Pant, chief economist at India Ratings, an arm of the Fitch group, adding that all four quarters of the year will remain in negative territory. “The government has so far focussed on supply side only, but unless they are willing to spend to spur demand side, the next year will also be dire.”

Also read: GDP growth in 2020-21 likely to go negative, says RBI Governor

Fellow economist Pronab Sen agreed that the government needed to step up its own expenditure. “Expecting people to draw down their savings indefinitely won’t be enough as much of the poor and middle class may have already wiped out their savings. The government can borrow from the market or the RBI (Reserve Bank of India) and I don’t understand their reluctance to do so. Is the government willing to let the economy go down the tube because they want to shore up their fiscal deficit numbers?” he asked. He expects a 10%-12% contraction in annual GDP, although he felt that the last quarter of the year may show some modest growth.

The Ministry of Commerce and Industry also released data on the eight core infrastructure sectors on Monday, showing that output contracted for a fifth straight month in July, with the 9.6% decline driven by a fall in production in the steel, cement and refinery products industries. The Centre’s Chief Economic Advisor Krishnamurthy Subramanian pointed to the core sector data as one indicator of a “V-shaped recovery”, as it has eased since the 38% contraction in April. 

“If you look at railway freight traffic, which is often times a good indicator of economic activity, in July, it is 95% of the level that it was last year. In fact, in the first 26 days of August, it is 6% higher than the same period last year. Power consumption is only 1.9% lower than last year. E-way bills in August, which capture inter-State trade, are at 99.8%, almost the same as last year, despite the presence of some local lockdowns. So overall, there is a V-shaped recovery. We should expect a better performance in the subsequent quarters,” he said, adding that the GDP contraction should be put in the context of a global recession due to COVID-19.

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Printable version | Dec 3, 2020 7:43:05 PM | https://www.thehindu.com/business/Economy/indias-gdp-contracts-by-record-239-in-q1/article32489345.ece

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