India’s economy contracted by 23.9 per cent in the April-June period, its worst performance since the quarterly measurement began in 1996, and probably the first contraction since 1980. The lockdown and suspension in economic activity due to Covid-19 was so massive that among a mix of advanced and emerging economies, India’s GDP contraction was the worst.
The damage visible across all areas of the economy was countered by two indicators. In the period of unprecedented economic contraction in manufacturing and services, the gross value added (GVA) in agriculture grew by 3.4 per cent compared to the same period of the previous year. On the demand side, while consumer spending and investments declined massively, government spending grew by 16 per cent, data released by the National Statistical Office shows.
Sans a good monsoon and enhanced borrowings by Centre and states to spend on food security, public healthcare, employment schemes and cash transfers, Q1 GDP growth could have plummeted by 27-30 per cent, a preliminary analysis by Business Standard shows.
Private consumer spending, the bedrock that contributes more than half of the Indian economy, got chipped by 27 per cent in Q1. But investments, represented by gross fixed capital formation, contracted by 47 per cent, their worst fall to date. GFCF is a key indicator for long term growth in developing economies.
State and central governments tried to balance the collapsing economy by spending more, and as a result, government expenditure is seen to have grown strongly by 16 per cent in Q1.
Among economic sectors, value added by industry saw a contraction of 40 per cent, on expected lines. The services sector which includes construction, trade, banking and financials, real estate and restaurants, faced a near-27 per cent decline in GVA, over the previous year.
A good monsoon and favourable sowing across the country gave a fillip to farm production estimates, and lifted the June quarter GDP.
“The economic performance in the April-June quarter is primarily due to an exogenous (due to an external cause) shock that has been felt globally,” chief economic advisor to the government KV Subramanian told reporters.
But using data from high frequency indicators, he also said that the government is hopeful about a V-shaped recovery soon.
“India is experiencing a V-shaped recovery after the Unlock phases have begun. Core sector output, rail freight, power consumption are coming back to their levels in the previous year. In fact, e-way bills are nearly back to their 2019 levels in August 2020,” he said.
Experts said that the contraction in Q1 GDP was bigger than the average expectation.
“The print indicates that the trough in the economy was much lower than expected and the pickup will likely be more elongated,” said Suvodeep Rakshit, vice president at Kotak Securities.
Nominal GDP growth, too, contracted by 20.9 per cent in the June quarter. While it was known, a contraction in nominal terms for the full financial year could spell trouble in terms of government revenues, and debt sustainability.
“Indian economy has clearly landed in a severe vicious cycle with the need for stimulating demand becoming paramount while the capacity to support demand by the government is at its weakest,” DK Srivastava, chief policy advisor at EY India, said in a note.
“With nominal GDP also showing a negative growth, tax revenues are also likely to contract sharply in the year as a whole,” he added.