Back on track? At minus 7.5%, economy looks better than expected

The pull-down impact of net exports, which benefited from a Covid-induced demand-compression in the economy in Q1, exacerbated again in Q2, as imports recovered.

India’s gross domestic product (GDP) shrank at 7.5% in September quarter, a contraction much narrower than feared by many, including the Reserve Bank of India (RBI), official data showed, as resilient consumers kept producers on their toes and let the economy claw its way out of the pandemic’s deep pit. The economy contracted at a record 23.9% in the first quarter of the fiscal; that was the steepest slide among G-20 countries.

Though robust release of pent-up demand and relatively buoyant rural economy —thanks to fortuitous good monsoon — have driven the recovery, the jury is out on whether and how strongly it will be sustained, now that the festival fervour has subsided. An apparent reversal of the gains in pandemic containment also poses a big threat to the revival’s continuity.

While manufacturing PMI rose to 58.9 in October, the highest in more than a decade, against 56.8 in September, separate data released on Friday revealed the output of core-sector industries, which have a share of about 40% in industrial production, fell 2.5% in October, after showing rapid sequential improvement to report flat growth in September. Diesel consumption in the first half of November was 5.1% lower than the year-ago level, while these were up 7.4% in October.

While the economy hasn’t received much government spending support in Q2 — government consumption expenditure fell 22% on year — the Controller General of Accounts on Friday said the Centre’s budget spending rose 9.5% on year in October, after a 26% fall in September; also, budgetary capex was up 130% on year, at Rs 31,519 crore.

The government, which was conspicuously absent to give support to the economy in the second quarter, apparently has since boosted its own expenditure and the spending via companies owned by it. However, as FE has recently reported, barring two ministries — rural development and food — no other ministry will likely exceed their original spending targets for the year, going by the revised estimates handed down to them by the finance ministry; unless substantial additional fiscal stimuli is announced soon, the Centre’s overall budgetary spending will likely remain below the Rs 30.4 lakh crore budgeted.

Considerably higher fiscal spending and sustained support from monetary policy committee are vital for keeping the momentum of recovery. RBI governor Shaktikanta Das indicated on Thursday that next week’s policy decision will keep supportive stance for growth.

Despite the improvement from Q1, India remained the worst-hit economy among the major ones, after the UK, which saw a 9.6% contraction in the September quarter. China recorded as much as 4.9% growth in July-September from a year earlier. According to a Reuters poll of economists, China is expected to expand by 2.1% in 2020, becoming the only major economy to grow this year.

Several established global agencies have recently offered a less gloomy picture of the Indian economy but still retained a cautious outlook. Some of them–such as the IMF, S&P, Moody’s and Fitch–have now predicted the growth rate for FY21 in the 9-10.6% range. Nevertheless, they have flagged downside risks to their assessments on possible continued escalation of the pandemic, which could then keep a leash on both private spending and investment for a longer-than-expected period.

Among individual sectors, manufacturing saw sharp pick-up from a 39% annual decline in Q1 to positive growth (0.6%) in Q2; agriculture and allied sectors grew at 3.4%, a very string rate by its standards in both the quarters. Fixed investment saw, for long in the doldrums improved to report just 7.3% decline on year in Q2, compared with a precipitous decline of 47% seen in Q1; of course a favourable base (-3.9%) aided this pick-up. Construction, which contracted 50% in the Q1 due to the lockdown, restored itself with a much narrower decline of 8.6% in Q2.

After the Q2 data release, chief economic advisor Krishnamurthy V Subramanian saw an “upside potential” to the RBI’s GDP forecast of a 9.5% contraction for FY21, provided a second wave of Covid-19 doesn’t occur.

A sharp narrowing of contraction in gross fixed capital formation in Q2 from a record decline in Q1 is an “encouraging sign”, he said, and noted the improvement was despite a slide in government spending in the September quarter.

Government final consumption expenditure was a key driver of the Q1 GDP, as it rose as much as 16.4% in Q1 when other demand components of the GDP had collapsed.

A contraction in nominal GDP narrowed sharply to 4% in the September quarter from a record 22.6% in the previous three months. This would somewhat soften the blow on the Centre’s fiscal deficit ratio, which threatened to record an even more dramatic slide after the first quarter estimate.

Gross value added (GVA), which is the value of output less the value of intermediate consumption, shrank by 7% in Q2, lower than the GDP fall of 7.5%. However, the GDP had contracted at a much steeper pace (23.9% vs 22.8%) than the GVA in Q1. An improvement in tax collections in the second quarter vis-a-vis the April-June period when the country went through a lockdown partly contributed to the narrowing gap.

The pull-down impact of net exports, which benefited from a Covid-induced demand-compression in the economy in Q1, exacerbated again in Q2, as imports recovered. The share of exports in GDP (in real term) slid to 20.9% in Q2 from 21.1% in the previous quarter. Before the improvement in Q1, the share of exports in GDP had shrunk for a fifth straight quarter.

Crisil chief economist DK Joshi attributed better-than-expected growth in Q2 to four drivers: pent-up demand; support from agriculture and select export sectors; cost savings for corporates; and a ‘learning to live’ attitude. However, the services sector will be more vulnerable in the second half, particularly contract-based services. “Despite this, we see this fiscal as a story of two halves with better growth performance and higher government revenue in the second part, both of which can support spending,” Joshi added.

Rupa Rege Nitsure, group chief economist at L&T Financial Holdings, said critical job-sensitive sectors like construction, mining and services continue to stay weak. “This data needs to be interpreted with caution as India has a very large unorganised sector and the measurement of its value added was not feasible due to restrictions on the movement of data collectors,” she said.

To be sanguine of the sustainability of the economic recovery, there are post-September some high-frequency data. Factory despatches by carmakers, including Maruti Suzuki India, Hyundai Motor India, Mahindra and Mahindra and Honda Cars India, suggest the industry has recorded a 17% y-o-y increase in October, the third consecutive month of growth. As for two-wheelers, Hero MotoCorp posted an impressive 35% y-o-y jump in domestic sales in October, while Bajaj Auto recorded a rise of 11% and TVS Motor 19%. Mumbai’s residential sector recorded its highest monthly registration in eight years in October. As many as 7,929 units were registered in October, recording a jump of 42% month on month and 36% y-o-y, showed the data by Knight Frank India.

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