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GDP shrinks 7.5% in Q2; manufacturing picks up, services sector worst hit

Encouraging, but need to be cautious due to Covid: CEA

By: ENS Economic Bureau | New Delhi | Updated: November 28, 2020 9:25:44 am
India's economy could prove to be 'most resilient' in subregion over long term: UNIndia's economy could prove to be the "most resilient" in the subregion of South and South-West Asia over the long term, according to a report by the UN. (File)

India’s economy shrank for the second straight quarter through September, recording a 7.5 per cent contraction in its Gross Domestic Product (GDP) in July-September, according to data released by the National Statistical Office (NSO) Friday.

The latest data is a significant improvement over the unprecedented 23.9 per cent year-on-year contraction in April-June due to damage inflicted by the pandemic-induced lockdown. However, given that there have been two consecutive quarters of contraction, the economy is technically in recession.

While this is the case across most global economies, what could be a cause for concern is that even with a smaller rate of contraction as compared to the first quarter, the Indian economy remains one of the worst performers among major economies.

Chief Economic Adviser Krishnamurthy Subramanian said the Q2 growth numbers were encouraging but there was need for caution as well. “We should be cautiously optimistic and the caution is warranted because the economic impact that we are seeing is primarily due to the pandemic,” he said.

Read | What’s driving Indian economy’s growth worries?

During July-September, the services sector was the worst hit, with trade, hotels, transport, communication and broadcasting services posting the sharpest contraction of 15.6 per cent among the eight major sectors. It was followed by 12.2 per cent contraction in public administration, defence and other services, 8.6 per cent contraction in construction, and 8.1 per cent contraction in financial, real estate, and professional services.

The manufacturing sector emerged out of the negative territory (39.3 per cent contraction in Q1) to post a 0.6 per cent growth in Q2. Agriculture, forestry and fishing also grew 3.4 per cent, same as the first quarter. Electricity, gas and other services posted a 4.4 per cent growth as against a 7 per cent contraction in the previous quarter.

With this, the GDP growth rate in April-September, the first half of this financial year, contracted by 15.7 per cent compared with a 4.8 per cent growth during the same period last year. In July-September last year, GDP had grown by 4.4 per cent.

Also Read | Core industries’ output shrinks for 8th straight month in October

According to Subramanian, the sustainability of the economic recovery depends critically on the spread of the pandemic. “While we have crossed the peak of the first wave in September, winter months must warrant caution. In this context, I must highlight that the second wave of the Spanish pandemic, which was a pandemic as devastating as this one, was quite intensive, something therefore each one of us should keep in mind,” he said.

Subramanian further said that till the pandemic does not go ahead, some of the sectors will continue to experience demand slumps such as travel and tourism and services sectors. “Typically my stance has been neither get too exuberant nor get too pessimistic,” he said, urging for some caution in the winter months.

Economists said the improvement in GDP in the second quarter was mainly due to private sector improvement even as the government expenditure was scaled back. “Catch-up action was firm in manufacturing activity reflecting better profitability from the corporate sector, alongside farm output which benefited from timely monsoons. On the expenditure-side, better faring domestic demand (ex-public sector) was supportive, along with net exports. The key counterweight weighing on growth was fiscal spending, showing up in weak government consumption and sub-par public administration. This reflects constrained headroom for the centre as well as state governments in the first half of the year,” Radhika Rao, Senior Vice President and Economist, DBS Bank said.

Read | Covid to washout FY21, economists see 10% growth in FY22 on low base

The GDP growth in nominal terms, which takes into account inflation, also recorded a contraction of 4 per cent in July-September as against a growth of 5.9 per cent last year.

Growth rate of Gross Value Added (GVA), which is GDP minus net product taxes, and reflects the income side of national accounts, declined 7 per cent in the second quarter as against a decline of 22.8 per cent in the first quarter and 4.3 per cent growth in the corresponding period last year.

The data is likely to undergo revisions as other data sources have been tapped into for estimating GDP in view of the restrictions imposed due to the Covid-19 pandemic, the NSO said. “Though the restrictions have been gradually lifted, there has been an impact on the economic activities. In these circumstances, some other data sources such as GST, interactions with professional bodies etc. were also referred to for corroborative evidence and these were clearly limited. Estimates are, therefore, likely to undergo revision, as per the release calendar,” it said.

Better than Q1

As expected, the second quarter has been better than the first for the economy. The improvement has been largely due to private sector demand, with lower fiscal spend reflecting in poor government consumption. The lower contraction is encouraging, but going forward, the recovery will depend on the spread of Covid-19 in winter.

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