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Govt expects better Q3 results, doesn’t see repeat of Q1 contraction in GDP

GDP in Q3 is expected to be better than in Q2 due to a broad-based improvement in various economic activity indicators, even as some of the crucial data points are starting to moderate.

By: ENS Economic Bureau | New Delhi | Updated: December 4, 2020 7:34:39 am
Nirmala Sitharaman, Nirmala Sitharaman on farm laws, new farm laws, farm laws protest, farmers protest, farmers protest news, indian expressFinance Minister Nirmala Sitharaman.

The Indian economy is expected to post an improved performance in October-December (Q3), the Finance Ministry said in its Monthly Economic Review for November, even as it stressed on the need for “cautious optimism” as there is a major downside risk of the spread of a second wave of Covid-19.

Even as it made a note of the moderation in some high frequency indicators late in November, the Ministry said that the record contraction in Gross Domestic Product (GDP) in the April-June quarter is “unlikely” to see a repeat.

“The year-on-year GDP contraction of 7.5 per cent in Q2 of 2020-21 underlies a quarter-on-quarter surge in GDP growth of 23 per cent. This V-shaped recovery, evident at the half-way stage of 2020- 21, reflects the resilience and robustness of the Indian economy…Moving deeper into Q3, there is a cautious optimism that global economic uncertainty does not mirror itself in India notwithstanding moderation of a few high frequency indicators late in the month of November,” the review said.

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In line with the recovery in the global economy, the sustained increase in major indicators beyond September raises hopes of a better performance in Q3, the review said. A less-than-expected contraction in GDP in Q2 was largely due to robust private sector performance, even as government consumption expenditure in Q2 contracted 22.2 per cent as against a 16.4 per cent growth in Q1.

The contraction in government consumption expenditure in Q2 reflects “the effort to consolidate the fiscal situation given fall in revenues”, the review said. The sharp slump in tax and non-tax collections means government expenditure remained nearly flat, and was supported by increased market borrowings.

“On the expenditure side, Centre’s total expenditure for the first seven months of FY2020-21 registered a y-o-y growth of 0.4 per cent, and stood at 54.6 per cent of BE (Budget Estimates) vis-à-vis 59.4 per cent of BE during the corresponding period in FY 2019-20.

“The revenue expenditure witnessed a growth of 0.7 per cent and the capital expenditure fell by 1.9 per cent during April to October 2020 compared to the same period last year,” it said.

GDP in Q3 is expected to be better than in Q2 due to a broad-based improvement in various economic activity indicators, even as some of the crucial data points are starting to moderate. While power consumption moderated from its double-digit year-on-year growth in October, it grew at 3.5 per cent in November.

The e-way bills generated, which have consistently improved since mid-August, witnessed a moderation in year-on-year growth from 21.4 per cent in October to 5.9 per cent in November. Manufacturing PMI moderated to 56.3 in November against the decade high level of 58.9 in October amid slower increases in factory orders. A PMI print above 50 means expansion and a score below 50 denotes contraction.

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The review pointed out that the economy benefited from economic support packages announced by the government, record levels of overseas equity flows in the Indian financial markets, effective monetary transmission leading to lower interest rates in the economy, and a robust agriculture sector performance. The demand for jobs under the Mahatma Gandhi National Rural Employment Guarantee scheme has surged, with a year-on-year growth of 47.2 per cent in November.

“The downside risk, however, remains the spread of a second wave of Covid-19. However, there is a growing cautious optimism that the steep plunges of April-June quarter of 2020 may not resurface with significant progress in vaccines and contact intensive sectors increasingly adapting to a virtual normal,” the report noted.

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