Indian economy sees a record fall

The Indian economy declined by a record 23.9% in the first quarter of 2020-21 (April-June), reflecting the economic cost of the complete lockdown imposed to fight the spread of the coronavirus disease (Covid-19) that was in place in April and May, the first two months of the period.

The contraction, the worst on record, was sharper than estimated by economists and could mean that the full year gross domestic product (GDP) for 2020-21 contracts by around 10%. That’s because most experts expect the GDP numbers to be revised downwards as more data from smaller companies, hit hard by the pandemic, and, eventually, data on the informal sector are factored in.

Gross Value Added, which measures the value of production minus taxes, declined 22.6%.

“With nominal GDP also showing a negative growth of about -23% in the quarter, tax revenues are likely to contract sharply in the year,” said DK Srivastava, chief policy adviser, EY India.

However, Krishnamurthy Subramanian, the chief economic adviser, claimed that “India is experiencing a V-shaped recovery after the unlocks have been announced”, citing the declining trend in core sector contraction, freight traffic growth (6% higher in the first 26 days of August compared to a year ago), and power consumption and E-Way bills (almost at last year’s levels) to buttress his point. “We should expect better performance in subsequent quarters,” he said.

Other data released on Monday showed that the core sector shrank by 9.6% in July, better than the 12.9% decline in June. Still, the number marked the fifth straight month of decline for eight core industry sectors.

The sharp fall in growth could encourage the Reserve Bank of India (RBI), currently holding interest rates, to consider a rate cut when it meets in October, although high inflation may hold its hand.

“The RBI still has its focus on growth. This slightly improves chances of a rate cut in October. Unless the inflation comes below 5% in the next reading, RBI might still postpone the rate cut to December,” Reuters quoted L&T’s chief economist Rupa Rege Nitsure as saying.

Among sectors, construction was hit the hardest, contracting by 50.3%, matched only by the trade, hotel, transport and communication sector, which declined 47%. Manufacturing contracted 39.3%. The agriculture sector provided the only silver lining, growing by 3.4%.

Private consumption as well as investments fell, indicating the hit on both the supply and demand side. Private consumption fell 26.7% and gross fixed capital formation, 47.1%. Government consumption, which grew 16.4%, the highest in five quarters, prevented a sharper fall.

Still, the government, which announced a ₹20 lakh crore economic stimulus and relief package in May, which also included credit guarantees and liquidity enhancing measures, will have to do more, experts said. “The 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,” said Srivastava.