The inevitable has happened. India’s GDP suffered its steepest contraction on record in the April-June quarter , as output shrank 23.9% from a year earlier, provisional data show. It is evident that the stringent COVID-19 lockdowns in force through the first third of the quarter, and substantially in May, hollowed out demand. Private consumption spending, which accounts for almost 60% of GDP, contracted 26.7% as consumers abjured almost all discretionary spending. And exports, which contribute to a fifth of GDP and reflect overseas demand for Indian goods and services, shrank by nearly 20%. Investment activity was the worst-hit, collapsing 47% and shrinking in share of GDP to about 22% from 32% a year earlier as larger businesses conserved cash and refrained from any capital spending in the face of uncertainty, and smaller firms prioritised survival. Across the real economy, every single industry and services sector shrank with the solitary exception of agriculture, which grew 3.4% and outpaced the year earlier quarter’s 3% expansion. Construction suffered the most, plunging 50%, followed by the omnibus services category — trade, hotels, communication, transport and broadcasting — which shrank 47%, hit by the pandemic-linked restrictions. Manufacturing too took a severe beating, contracting 39% as demand for products deemed non-essential evaporated, and factories, even after reopening, struggled to run amid shortages of labour and added safety norms.
It was left to the government to keep the bottom from falling out on demand as the Centre’s pandemic mitigation expenditure helped expand its consumption spending by 16.4% year-on-year and softened the overall blow to GDP. However, with the fiscal deficit already having exceeded the full-year’s budgeted target in just the first four months, and revenue receipts impacted by the economic contraction, the government is unlikely to maintain a similar trend in expenditure growth over the next three quarters. Unless, of course, it is prepared to forsake its vaunted fiscal conservatism and finds innovative ways to mobilise resources. The still rising trajectory of new COVID-19 infections and a high level of job losses and income erosion are also sure to retard any recovery in momentum. If the latest survey-based data from IHS Markit show manufacturing PMI for August signalling growth for the first time in five months, the same researcher’s findings also stress that “job shedding continues at a strong rate” in the industry. Equally significantly, the output numbers which are expected to undergo revision given the acknowledged difficulties in collecting data, do not capture a swathe of informal sector activity that was severely impacted. Agriculture too faces headwinds in the form of higher-than-ideal rainfall in August in several key crop growing regions in western and central India and with the impact of recent farm market ordinances yet to play out, it may be a while before the end of the tunnel is sighted.