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Services sector continues to languish although the revival in construction should help. (Photo: Mint) (Mint)
Services sector continues to languish although the revival in construction should help. (Photo: Mint) (Mint)

India’s economy may be healing better but headwinds remain

Financial services and real estate were worse off in the September quarter and this should worry

India’s economy is officially in a recession with two consecutive quarters of contraction but the hopes of a faster recovery are getting entrenched by the day.

Gross domestic product (GDP) shrank by 7.5% in the September quarter, milder than what the markets expected. Most analysts were pencilling in at least a contraction of 8% and the Reserve Bank of India (RBI) had put the number at -8.6% in its nowcasting model. The final print has surprised even the recent optimistic revisions in the market.

The GDP print was better than expected.
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The GDP print was better than expected.

What this means is that the economy has managed to sprint once restrictions on mobility were reduced in June. The progressive unlocking meant that India’s factories began humming faster and Indians willingly turned into consumers of goods.

As expected, agriculture held up yet again, clocking a growth of 3.4% for the second consecutive quarter. But the surprise was manufacturing. The gross value added of manufacturing showed a growth of 0.6% against expectations of a contraction of as much as 9% by some economists. To be sure, analysts had expected manufacturing to show improvement from a disastrous first quarter. Even so, the bounce back has been more than expectations.

But one needs to be careful in reading too much into the manufacturing improvement story. Granted that the signs of a swift recovery were visible in the quarterly results of listed companies. GVA not just reflects the output but also the profitability of companies. Here, we need to note that companies protected their profitability by cutting costs and this may not sustain in the coming quarters. The 4.4% growth in electricity and other utilities should cheer. But here too, high frequency data since October are showing some signs of slowing down.

Services sector continues to languish although the revival in construction should help. Financial services and real estate were worse off in the September quarter and this should worry.

While the better than expected GDP print indicated that the economy may be doing well, it may not be enough to upgrade forecasts for a milder recession in FY21.

A key threat in the making is the rising covid-19 cases in some states which may trigger fresh restrictions. The headwinds for the economy are still strong which should keep policymakers on guard in the coming quarters.

"The recovery still faces several headwinds. The underwhelming fiscal response to the crisis will guarantee a legacy of higher unemployment and firm failures. In turn, this will inflict further damage on the banking sector, which entered the crisis in poor shape," said Shilan Shah, senior India economist, Capital Economics.

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