The Indian economy shrank by 7.5% in the second quarter of 2020-21, doing better than most analysts expected it to, although the touch of grey to this silver lining was provided by the fact that with the second consecutive quarterly decline, it is technically in recession — a result of the lasting effect of the 68-day lockdown enforced to slow the coronavirus disease, and some lingering restrictions.
A Reuters poll of economists had projected an 8.8% contraction in the September quarter from a year ago. The 7.5% decline is a sharp improvement from the 23.9% contraction seen by the economy in the previous quarter, although much of India spent two entire months of that period almost completely under lockdown. The recession is India’s first in at least 24 years.
“I would say, we should be cautiously optimistic and the caution is warranted because the economic impact that we are seeing (in the June and September quarter) is primarily due to the pandemic”, chief economic adviser Krishnamurthy Subramanian said while commenting on the economic outlook. “While we have crossed the peak of the first wave in September, winter months must warrant caution.” He pointed out that the second wave of the Spanish Flu in the early 20th century was worse than the first.
The finance ministry said in a series of tweets that the number “buttresses recovery as captured in several high frequency indicators” and pointed to the high purchase managers index 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 and infrastructure goods”.
Experts are divided about growth trajectory in the second half of the fiscal year. Speaking to Bloomberg Quint, India’s former chief statistician Pranab Sen said that he expects the third quarter numbers to deteriorate once again.
The second quarter had the unusual fortune of having tailwinds from both the pent-up demand due to the lockdown and the forthcoming festive season. These factors will not be there in the third quarter, he said. The fact that index of eight core sector industries suffered a bigger contraction of 2.5% in October compared to 0.8% in September supports such a view.
Some of the improvement in the second quarter’s and subsequent numbers could also be a result of a favourable base effect, as India’s GDP growth had been falling even before the pandemic erupted.
Another area of concern vis-a-vis the economy is a fall in government 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 a bigger fiscal stimulus. The Indian economy is expected to contract by 9.1% in the current fiscal year according to the RBI.
To be sure, the pace of sequential recovery is varied across sectors and the service sector, which accounts for more than half of India’s GDP, continues to be the worst affected. Factory production has proven to be the most resilient with the Gross Value Added (GVA) component of manufacturing registering a positive growth in the September quarter. This is a first since September 2019.
Construction and Trade, Hotel and Restaurants sectors, which together employ more than 20% of India’s workers, contracted by 8.6% and 15.6% respectively.
Agricultural performance has been consistent with 3.4% growth in both the June and September quarter.
The latest numbers also suggest that the improvement from the June to September is despite, and not because of government spending. Both components of public spending in the GDP and GVA numbers; Government Final Consumption Expenditure (GFCE) in GDP and the Public Administration, Defence and Other Services in GVA, have actually worsened between the June and September quarter. GFCE grew at 16.4% on an annual basis in the June quarter. It has contracted by 22.2% in the September quarter. The Public Administration, Defence and Other Services component of GVA contracted at a higher pace of 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. PFCE contracted at 11.3% in the September quarter compared to 26.7% in the June quarter. For GFCF the improvement was from 47.1% contraction in the June quarter to a 7.4% contraction in the September quarter.
A comparison of the September quarter GDP numbers with other major economies shows that while India is not the worst performing country unlike in the June quarter — the United Kingdom’s GDP contracted by 9.6% during this period — it still lags behind other major economies.
Statistics from the Controller General of Accounts (CGA), which works under the ministry of finance, suggest that the central government has been holding back on spending to match even what was committed in the last budget.
The shortfall is bigger for capital expenditure, which is more important for long-term growth. The central government has spent only 55.7% and 47.9% of the budgeted revenue and capital expenditure until October this year. These figures were 59.4% and 59.5% respectively in October 2019. The biggest reason for a squeeze in Centre’s spending could be a revenue shortfall. Revenue receipts until October 2020 were just 34.2% of the budgetary targets compared to 46.2% for the same period last year. The fact that nominal GDP growth has recovered at a much faster rate than real growth; from a 22.6% contraction in the June quarter to just 4% contraction in the September quarter, may create some cushion for the revenue situation, as taxes are a fraction of nominal incomes.
But some analysts see an upward bias in the current GDP numbers.
“Positive growth in manufacturing hence has been a surprise, which goes along with negative Index of Industrial Production growth in the real sector. As value added is used for the organised sector there was an upward bias in the estimate”, said a note by Madan Sabnavis, chief economist at CARE Ratings.
Businesses expect the economic situation to improve going forward. “We are certain this trend will continue and the figures for the third quarter will reflect that,” Chandrajit Banerjee, director general of the Confederation of Indian Industries, said in a statement.
To be sure, the demand for a bigger fiscal boost continues. “An increase in government spending would help this momentum for a more robust growth in the coming months,” Banerjee added.