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Icra expects GDP growth in Q4 of FY 2017-18 at 7.4% on account of good rabi crop harvest and improved corporate earnings, up from 7.2% in the third quarter. Photo: HT
Icra expects GDP growth in Q4 of FY 2017-18 at 7.4% on account of good rabi crop harvest and improved corporate earnings, up from 7.2% in the third quarter. Photo: HT

Indian economy likely to contract a record 7.7% in FY21: NSO

The pace of contraction in the Indian economy slowed in September quarter to 7.5% from a historic high of 23.9% contraction in June quarter due to the shock caused by the covid-19 induced nationwide lockdown

The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years with the services sector most hit by the coronavirus pandemic while agriculture remains the only silver lining, according to the data released by the National Statistical Office on Thursday.

The economy grew at 4.2% in FY20, lowest in 11 years.

So far, India has had five instances of recession or real GDP contraction since the nation's independence in 1957-58 (-1.2%), 1965-66 (-2.6%), 1966-67 (-0.1%), 1972-73 (-0.6%) and 1979-80 (-5.2%).

According to the first advance estimates of GDP for FY21, while agriculture sector is projected to grow at 3.4% in FY21, manufacturing sector is estimated to contract 9.4% while electricity is likely to grow at 2.7%. Among services sectors, trade, hotel, transport is the worst impacted with a projected contraction of 21.4% while public administration and other services indicating largely government expenditure is also estimated to shrink 3.7%. On the demand side, government final consumption expenditure is estimated to support the economic recovery with projected overall growth of 5.8% in FY21.

The finance ministry in a statement said the advance estimates reflect continued resurgence in economic activity in third and fourth quarter of FY21 and endorses the strength of economic fundamentals of the country to sustain a post-lockdown V-shaped recovery. “The movement of various high frequency indicators in recent months, points towards broad based nature of resurgence of economic activity. The relatively more manageable pandemic situation in the country as compared to advanced nations has further added momentum to the economic recovery," it added.

While the economy contracted 15.7% in the first half (April-September) of FY21 released on 30 November, the first advance estimates of GDP incorporates factory output data of one additional month (October) and data from some lead indicators till November and December. With the government shifting the date of presentation of the union Budget to 1 February from last day of February starting FY18 Budget, the statistics department also advanced the release of the first advance estimates so that the government has an annual estimate of GDP to be incorporated in Budget calculations even at the cost of lesser accuracy.

What will impact budget calculations, especially fiscal deficit, is the nominal GDP estimate of 4.2% contraction against 10% expansion assumed in the FY21 budget. India’s nominal GDP is projected at 194 trillion instead of 224 trillion assumed in the Budget.

Madan Sabnavis, chief economist at Care Ratings said the first advance estimates of GDP growth need to be viewed with caution as extrapolation of available data has its limitations. “GDP growth is expected to improve in the remaining two quarters of 2020-21 with the improved pace of pickup in economic activity across most sectors. Consumption demand and investments which is necessary to propel the economy would continue to be tepid and is unlikely to see a noteworthy improvement during the course of the year. Despite the resumption of business activities and announcement of the rollout of the vaccine, demand in the contact intensive (services) sectors is likely to remain subdued for some time due to continued social distancing norms. Additionally, stringent lockdowns in European countries and rising cases of covid-19 and its new variant globally could adversely impact exports," he added.

The pace of contraction in the Indian economy slowed in September quarter to 7.5% from a historic high of 23.9% contraction in June quarter due to the shock caused by the covid-19 induced nationwide lockdown. The World Bank in its Global Economic Prospects released on Tuesday retained its earlier projection of 9.6% contraction of Indian economy in FY21 reflecting a sharp drop in household spending and private investment. The Reserve Bank of India last month projected the Indian economy to contract 7.5% in FY21, shallower than 9.5% contraction it projected just two months ago, on the back of a host of lead indicators, suggesting sustained economic recovery. It expects the economy to post 0.1% growth in December quarter and 0.7% in March quarter to end FY21 with 7.5% contraction. The finance ministry also expects marginal positive growth in the economy beginning December quarter.

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