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Friday, April 23, 2021

Economy exits recession as GDP grows 0.4% in Q3; Govt cautions pandemic risk persists

In a statement, the Finance Ministry said the Q3 numbers were a reflection of the further strengthening of a V-shaped recovery, but warned that India was not yet out of the danger of the pandemic.

Written by Aanchal Magazine | New Delhi |
Updated: February 27, 2021 7:11:45 am
Finance Minister Nirmala Sitharaman with MoS (Finance) Anurag Thakur at the GST Council meeting on Thursday (Twitter/Ministry of Finance)

The Indian economy emerged out of technical recession in October-December 2020 and grew 0.4 per cent with improvement in manufacturing, construction and agriculture.

According to the second advance estimates released by the National Statistical Office on Friday, the economy will, however, face a deeper 8 per cent contraction for the full year 2020-21, as against the earlier estimate of 7.7 per cent.

NSO’s second advance estimates are obtained by extrapolating indicators like the Index of Industrial Production (IIP) of the first nine months of the financial year. The estimates were likely to undergo “sharp revisions” since data collection for IIP and CPI were impacted due to restrictions imposed in March last year in view of the pandemic.

In a statement, the Finance Ministry said the Q3 numbers were a reflection of the further strengthening of a V-shaped recovery, but warned that India was not yet out of the danger of the pandemic.

The GDP had contracted by 23.9 per cent and 7.5 per cent in the April-June and July-September quarters, respectively, marking a technical recession in the aftermath of the Covid-19 pandemic. The GDP rates for Q1 and Q2 have now been revised to (-)24.4 per cent and (-)7.3 per cent, respectively.

In the third quarter, the manufacturing sector grew 1.6 per cent as against a contraction of 1.5 per cent in the previous quarter, and 2.9 per cent contraction in October-December 2019. The construction sector also gained momentum, growing 6.2 per cent in October-December 2020, as against a contraction of 7.2 per cent in the previous quarter, and 1.3 per cent contraction during the same period last year.

The GDP growth estimate of 0.4 per cent for the third quarter this year is higher than 0.1 per cent growth projected by the Reserve Bank of India. In the corresponding quarter last year, the economy had grown 3.3 per cent.

Growth in agriculture picked pace and jumped 3.9 per cent in October-December compared with 3 per cent growth in July-September and 3.4 per cent growth during the corresponding quarter last year.

Financial, real estate and professional services grew 6.6 per cent as against 9.5 per cent contraction in the previous quarter and 5.5 per cent growth in the corresponding period last year.

Mining, trade, hotels, transport, communication and broadcasting services and public administration services continued to stay in the negative territory in the third quarter registering a contraction of 5.9 per cent, 7.7 per cent, and 1.5 per cent, respectively.

Cumulatively, for April-September, the Indian economy recorded a contraction of 10.4 per cent as against 4.4 per cent growth last year.

Economists expected only a mild improvement going ahead, as a projection of 8 per cent contraction for the full year implies a contraction again in the fourth quarter. “Intriguingly, GDP is implicitly projected by the NSO to slip back into a contraction of 1.1 per cent in Q4 FY2021, which may be an unintended consequence of the back-ended release in the Government of India’s subsidies,” said Aditi Nayar, Principal Economist, ICRA.

“Various lead indicators have recorded a loss of momentum so far in Q4 FY2021, in contrast to the improvement in sentiment brought on by the vaccine rollout. We expect consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries, and the self employed,” she said.

The Finance Ministry said the Q3 GDP numbers showed the success of the government’s initial policy of “lives over livelihood”. “The sharp V- shaped recovery has been driven by rebounds in both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF) as a combination of astute handling of the lockdown and a calibrated fiscal stimulus has allowed strong economic fundamentals to trigger quick resumption of high activity levels in the economy,” it said.

It, however, said India was not yet out of the danger of the pandemic. “Social distancing continues to be the most effective tool to combat the pandemic as activity levels continue to rise in the economy boosted by the rapidly escalating inoculation drive in the country,” it said.

The growth rate in terms of gross value added (GVA) — which is GDP minus net product taxes, and reflects growth in supply — is seen contracting 6.5 per cent in 2020-21 as against earlier estimate of 7.2 per cent and 3.9 per cent in the previous year. GDP in nominal terms, which factors in inflation, is estimated at (-)3.8 per cent in the second advance estimates, up from the first advance estimate of (-)4.2 per cent.

On the expenditure side, gross fixed capital formation — an indicator for private investment — picked up pace to grow 2.6 per cent in October-December. Government final consumption expenditure contracted by 1.1 per cent in October-December, while other drivers of demand in the form of private consumption expenditure contracted by 2.4 per cent.

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