Q2 GDP: Economy may recover from record fall, contraction may narrow sharply but can’t stop recession

Q2 FY21 GDP: India’s economy is expected to have undergone a significant improvement in the second quarter (Jul-Sep) of the current fiscal year 2020-21 after the lockdown restrictions were gradually lifted. While the country’s GDP shrank by a record 23.9 per cent in the fiscal first quarter due to strict nationwide lockdown and near-standstill businesses, the GDP is estimated to have substantially narrowed contraction to a single digit in Q2. However, it is true that the Indian economy has likely fallen into a technical recession as the GDP is expected to have shrunk in the two consecutive quarters this fiscal year.

While the Reserve Bank of India has estimated a GDP contraction of 8.6 per cent in Q2, Bank of America estimated the shrinkage of 7.8 per cent in the same quarter. Further, Morgan Stanley, ICRA and Care Ratings have estimated a GDP contraction of 6 per cent, 9.5 per cent, and 9.9 per cent respectively in the second quarter of the current fiscal.

The likely positive impetus in Q2 is based on two factors — anticipation of a pick-up in demand during the festivals and an uptick in corporate profit, which is driven more by the cost-savings rather than top-line growth. Further, this sudden surge in economic activity is unlikely to sustain in the coming months. 

Also Read: Economic revival mostly due to pent up demand, base effect; unlikely to sustain after festivals

The spikes in the production seen in various sectors in the month of October are an exaggeration of the true recovery on the ground, as those have been driven by a large component of pent-up demand that may not sustain after the festive period is over, rating agency ICRA said in a report. Prominent base effects have also supported the trends in certain sectors, the report added.

The Q2 GDP figures are scheduled to be released on 27 November 2020. The GVA growth data about sectoral growth in manufacturing, services, and agriculture sectors will further give a clear picture about India’s path of economic recovery post-pandemic.