Q1 figures paint a sordid state of the economy, no respite likely this fiscal3 min read . Updated: 31 Aug 2020, 11:50 PM IST
The contraction was broad-based with all sectors of the economy contracting except agriculture which was able to register a growth of 3.4% because of early opening up of the sector to facilitate sowing
The National Statistical Office (NSO) released the first estimate for Q1 FY21 gross domestic product (GDP). In line with the market expectation, the figures witnessed sharp contraction to the tune of 22.6% in current prices and 23.9% in constant prices. For the first time in India’s recorded statistical history, all the eight GDP segments have seen major contraction in the April-June quarter of 2020. Interestingly, the average decline of 60 economies in April-June 2020 is 12.2%.
The contraction was broad-based with all sectors of the economy contracting except agriculture which was able to register a growth of 3.4% because of early opening up of the sector to facilitate sowing. Interestingly, the nominal growth in agri GDP was 5.7%, down from an average nominal GDP growth of 13.5% in the previous quarter, indicating that a full-fledged rural recovery may have been also impacted by a decline in allied activities. The other primary sectors namely mining, suffered the same fate as the rest, contracting 23.3%.
Hotels, construction and manufacturing secured the podium position and suffered steep contractions of 47%, 50% and 39%, respectively. The three sectors combined account for the bulk of the employment in non-agriculture sector and the state of affairs is the story of demand erosion that the economy is now witnessing.
The financial services overall saw contraction of 5.3% but full segregated data may show gains made in banking were largely offset by losses in insurance sector. The financial sector has largely been able to insulate itself from the disruption due to greater technology integration, quick roll- out of work from home measures and banking being an essential service.
The surprise element is the loss of GVA (gross value-added growth) in public administration and defence to the tune of 10.3% alongside a simultaneous expansion of government consumption to the tune of 18%. This is not difficult to reconcile as government GVA is the sum of intermediate consumption, compensation of employees, consumption of fixed capital and other taxes, less subsidies, on production. Of these, there was a sudden fall in intermediate consumption, which includes contingent expenditure such as office supplies, rent, rates and taxes, fuel and light, printing, travel expenses, telephone and telegraph charges, and purchase of other commodities and services for current operations.
On the expenditure side, except government consumption every component contracted, including valuables. Thus the GDP estimates for the Q1 have been delivered under acute constraints. The timelines for filing statutory returns were also extended by most regulatory bodies. In these circumstances, the usual data sources were substituted by alternatives like GST, interactions with professional bodies etc. and which were clearly limited, according to the NSO.
The data challenges in the case of other underlying macro-economic indicators like IIP and CPI, used in the estimation of National Accounts aggregates, will also have implications on these estimates. The estimate of the implicit GDP deflator will be impacted by the CPI imputation methodology and therefore are not much reliable.
On the whole, the GDP figures paint a sordid state of the economy. India’s experience is no different from that of Germany and the UK which have also seen large contraction in quarterly GDP figures.
Where do we go from here? The Q1 GDP numbers reveal that the demand destruction is now much worse than expected. A revival in construction and services will be necessary to support the nascent growth in agriculture.
The pandemic is unlikely to have hit a peak and it is most likely that Q2 GDP will also witness a double-digit contraction, and we might not get a positive GDP growth in any of the forthcoming quarters in FY21. The figures further emphasise the need to rework revival strategy. We need to handhold the states in their fight with epidemic and ensure that the states get an immediate frontloaded support from the central and state disaster funds, apart from other fiscal support so that they can avoid getting into self-imposed lockdowns.
Soumya Kanti Ghosh is group chief economic adviser at the State Bank of India. Views expressed are personal.