COVID-19 impact: GDP shrinks by quarter in Q1, yet govt slows spend

But more robust evidence is required of a sustained recovery, which is also contingent on how quickly the pandemic is curbed.

The pandemic that befell the world almost like a bolt from the blue has expectedly taken a heavy toll on India’s gross domestic product (GDP) — it contracted by a quarter, an unprecedented 23.9% to be precise, in the June quarter. This was on the higher side of analyst estimates of the dip, which varied between 15-26% roughly.

In no quarter since India began releasing quarterly GDP data in FY96, the economy shrank – the previous worst quarterly growth figure was 0.2% reported in Q4FY09, following the global financial meltdown. The gross value added (GVA), which basically captures what accrues to the producer/service provider before a product or service is sold, shrank at an unheard-of rate of 22.8%  in Q1, as per data put out by the National Statistical Office (NSO).

Among individual sectors, “agriculture, forestry and fishing” held up in Q1 (GVA up 3.4% on year, versus 3% in the year ago quarter), to be the silver lining on the cloud, consisting of manufacturing (-39.3%), construction (-50.3%) and ‘trade, hotels, transport, communication etc. services” (-47%).

Curiously, the government, despite its claim that a massive stimulus of over 10% of GDP (mostly consisting of credit facilitation) has been unveiled, has lately applied the brakes on budget spending. The Centre’s Budget spending in April-July was up just 11.3% on year, compared with the targeted growth (Budget estimate) for the full year of 13.2%. For July, the spending growth was a mere 6% on year, against 46% achieved in June, according to the official data released separately on Monday. Worse, the budget capex in July at Rs 23,576 crore was down a sharp 47% on year.

Of course, the higher transfers under assorted government schemes, including MG-NREGA, PM Kisan and Jan Dhan, and stepped up budget and CPSE capex, provided a strong backing to the devastated economy in Q1 — the government final consumption spending grew 16.4% on year in the quarter. Once this contingency was addressed, the July figures suggest, government has quickly curbed spending, to avoid a widening of the fiscal deficit for FY21 beyond 7% of GDP or thereabouts.

Among other economic constituents, private consumption, the largest one, declined 26.7% on year in Q1 (its growth was already a dismal 2.7% in the Q4 last fiscal). Investment (gross fixed capital formation) almost halved (-47%) from the year ago quarter, exacerbating its negative growth witnessed since Q2 last fiscal.

Agriculture, despite its limited share in GDP, could continue to do well in the balance of the year too, given that sowing of kharif crops already touched a record 1082.22 lakh hectares and monsoon precipitation has been robust and well-spread, potentially boosting the winter crop as well.

Sujan Hajra, chief economist at Anand Rathi Securities, said: “The Reserve Bank of India (RBI) won’t lose too much sleep on this number as it was expected. This (GDP number) slightly improves chances of a rate cut in October.” However, unless retail inflation drops below 5% in the next reading (it shot up to 6.93% in July from 6.23% in the previous month) , the RBI may still postpone the rate cut to December, he added.

On the positive side are some high frequency indicators, which are looking up. But more robust evidence is required of a sustained recovery, which is also contingent on how quickly the pandemic is curbed.

For a quick take, IIP contracted at a slower pace (-16.6%) in June, compared to -33.9% in May; passenger vehicle sales picked up sharply in June with sales of 1,20,188 units as compared to 33,546 units in April-May; power consumption shows a continued contraction, but the rate of contraction has been coming down over successive months since April 2020. On Monday, official data also showed that contraction in eight key infrastructure industries narrowed to 9.6% on year in July from 12.9% y-o-y fall witnessed in the previous month.

Several analysts had forecast India’s annual GDP to shrink by up to 6.8% in the current fiscal. The International Monetary Fund (IMF) has predicted a 4.5% contraction for the Indian economy in FY21, before recovering in the next fiscal to record a 6% expansion.

The Centre’s strategy seems to be to keep the FY21 budget size roughly the same as budgeted level of Rs 30.4 lakh crore (BE), which itself might require the fiscal deficit to widen to roughly 7% of the GDP, as against the budgeted 3.5%, given the huge revenue shortage. However, analysts prescribe much stronger government support to the economy.

Recommending public sector borrowing (Centre and States) of 15% of GDP in FY21 to ensure the financing of national infra pipeline for the year, EY said, “Deficit monetization/borrowing from abroad of Rs 3 lakh crore and unutilized cess funds amounting to Rs 2 lakh crore together provide resources up to Rs 5 lakh crore for potential infrastructure investment in the next few months”.

Nominal GDP shrank by a record 22.6%, year on year, in the June quarter, which will weigh on the centre’s fiscal deficit ratio.

Although net exports had long been a drag on GDP, in real term, its performance beat other critical segments of national income in the June quarter, as imports contracted at a much sharper pace, mirroring a demand compression in the economy. Having shrunk for a fifth straight quarter, the share of exports (in real term) in GDP improved to 21.1% in Q1FY21, against 17.6% in the previous quarter and 20% a year before. However, as imports limp back towards normalcy, the pulldown impact of net exports on the economy could be back in the second quarter.

Aditi Nayar, principal economist at ICRA, said: “The wide discrepancy between the double-digit growth of government final consumption expenditure on the expenditure side, and the contraction in public administration, defence and other services on the production side, is rather incongruous.”

Some economists, including Nayar and Rupa Rege Nitsure of L&T Financial Holdings, expected a sharper slide in real GDP once the June quarter data go for revision, on the ground that data collection was hit by the pandemic and that the statistics office had to use substitutes and proxies to estimate the losses of the informal sector.

In fact, even before the pandemic hit the country, the economy was on several-quarters-long decline, and was yet to hit the bottom. Quarter-wise data reveal, for instance, the extent of debilitation of the investment pillar before Covid-19 struck the economy — growth in gross fixed capital formation declined precipitously from 4.6% on year in Q1FY20 to (-)3.9% in Q2FY20, to (-)5.2% in Q3 and further to (-)6.5% in Q4.