GDP shrinks at slower 7.5% after Q1 washout2 min read . Updated: 28 Nov 2020, 12:10 AM IST
- Second quarter contraction pushes economy into a technical recession
- The Q2 contraction was less than the 8.2% decline estimated by economists
The Indian economy appeared to be pulling out of a record slump caused by the covid-induced lockdown, with output shrinking at a slower pace of 7.5% in the September quarter (Q2), but the two straight quarters of contraction means the economy has entered a recession.
A rebound in manufacturing, power generation and sustained farm output growth supported the rebound in gross domestic product (GDP) from Q1 when the economy shrank by nearly a quarter, the country’s worst performance since Independence. The Q2 contraction was also less than the 8.2% decline estimated by economists surveyed by Bloomberg.
The recovery is expected to continue in Q3 as the government lifts curbs on most economic activities that were imposed in March. The Reserve Bank of India said on 11 November that it now expects an economic expansion in the December quarter, earlier than it previously estimated.
The better-than-expected growth in Q2 was driven by pent-up demand, support from agriculture and select export sectors, cost savings for corporates and people’s “learning to live with the pandemic" attitude, said Dharmakirti Joshi, chief economist at CRISIL Ltd.
India’s growth is still lagging behind other major Asian economies such as China, which expanded 4.9% in the September quarter; Japan, which grew 5%; and Singapore, which contracted 5.8%.
Chief economic adviser in the finance ministry Krishnamurthy Subramanian said the economic data was encouraging, but cautioned that the economic trajectory hinges on how the pandemic evolves in the winter months ahead.
“My sense is that we should definitely be continuing the recovery, provided the pandemic remains in control," Subramanian said, adding that more recent indicators in October showed that the economy clearly was in an expansionary phase.
He cited the improvement in high-frequency indicators for October, including purchasing managers’ indices for manufacturing and services, number of digital transactions, power consumption, e-way bill generation, railway freight, e-toll collections, tractor and fertilizer sales to support his contention that the recovery was on.
Gross value added (GVA) in manufacturing recovered from the 39.3% contraction seen in Q1 and reported a small growth at 0.6% in Q2.
The farm sector growth, which stayed unruffled by the lockdown in Q1, sustained the performance in Q2 too on account of improved Kharif sowing and robust and widespread monsoon. Agriculture GVA grew 3.4% in Q2, similar to the expansion seen in Q1. GVA excludes net indirect taxes.
GVA in power and other utilities grew 4.4% in Q2 after a 7% contraction in Q1. Among services, the worst-affected segment of the industry, the GVA in construction contracted 8.6% in Q2, recovering from the 50.3% contraction in Q1. Trade, hotels, transport, communication and services related to broadcasting shrank 15.6% in Q2, after a massive 47% contraction in Q1.
Government spending in Q2, however, showed a 22.2% decline from the year ago after a spike in Q1, which, according to EY India chief policy adviser D.K. Srivastava, indicated “weak fiscal stimulus".