The Indian economy contracted by a staggering 23.9 per cent in the first quarter of the current financial year — a period when economic activities were largely curtailed due to the imposition of a national lockdown to deal with the spread of the COVID-19 pandemic. With the exception of agriculture and allied activities, value added by all other sectors in the economy witnessed a contraction, underlining how grim the scenario is. Excluding the farm sector, the rest of the economy contracted even more severely by almost 27 per cent. This is also the first time the Indian economy has contracted since the government began releasing the quarterly growth estimates in 1996-97. However, as these estimates tend to rely largely on the listed corporate sector data, and don’t accurately capture the state of the informal economy, they may well be underestimating the true extent of the shock. Subsequent revisions of the data may well provide a more accurate assessment of the economic pain stemming from the COVID-19 pandemic.
The agriculture and allied activities sector was the only bright spot in the first quarter. The sector, which was excluded from the lockdown restrictions, grew by 3.4 per cent on the back of a healthy rabi harvest. A good monsoon, coupled with healthy sowing of the kharif crop suggests that it may well continue to grow at a relatively healthy pace. But the manufacturing sector collapsed by 39.3 per cent, while construction activities fell by a staggering 50.3 per cent. On the services side, sectors such as aviation and hospitality fared badly, with the trade, hotels, transport and communication sector declining by 47 per cent. Private consumption fell by a little more than a fourth during this period, underlining the collapse in household demand. Going forward, the continuing uncertainty over income and job prospects, coupled with the fear of moving in crowded places is likely to continue to weigh down household spending, especially discretionary spending. Investment activity declined by a staggering 47.1 per cent, while government consumption expenditure, arguably the only driver of growth in the current scenario, grew by a healthy 16.4 per cent.
Leading economic indicators suggest that parts of the economy have continued to improve sequentially. However, hopes and expectations of a quick bounce back to pre-COVID levels in the near term are likely to be dashed, with indications of some economic activities plateauing at below pre-COVID levels. While the pace of contraction may well ease, the near term prospects don’t appear to be promising. With the number of COVID-19 cases still rising, and localised lockdowns continuing, self-imposed curbs by individuals, coupled with risk-aversion by both households and businesses, suggest that normalisation of activities to pre-COVID levels is unlikely in the near term.