Home / News / India /  Virus bites, lockdown hurts, GDP shrinks by most in Q1

NEW DELHI : India’s economy contracted by a historic 23.9% in the June quarter, earning the nation the grim distinction of the fastest-shrinking major economy, a downward spiral that has been triggered by the coronavirus crisis.

The GDP data highlighted the extent of economic damage inflicted by the pandemic and the ensuing lockdown to stem the spread of the virus.

A recovery seen in the weeks after India lifted most of the restrictions on economic activity is also showing signs of sputtering as the country has emerged as the world’s fastest-growing region in terms of new virus infections, reporting 78,512 cases on Monday. Infrastructure output continued to contract in July, indicating a revival will be slow and contingent on how soon the infection rate is brought under control.

Data released by the National Statistical Office on Monday showed manufacturing, construction and trade sectors experienced massive contraction at 39.3%, 50.3%, 47%, respectively. Government expenditure, as represented by the public administration, defence and other services, contracted 10.3% though government final consumption expenditure grew at 16.4% during the quarter. On the demand side, both private consumption and investment shrank 26.7% and 16.3%, respectively.

K. Subramanian, the chief economic adviser to the finance ministry, said the economic performance was primarily due to an exogenous shock that has been felt globally. “What is important is that India is experiencing a V-shaped recovery after Unlock has been announced. We should expect better performance in the subsequent quarters," he added.

However, former finance minister P. Chidambaram in a statement said the GDP estimates do not come as a surprise to him even though the government was seeing ‘green shoots’ on several days during the first quarter. “Let me say with regret: it will take many months before the economy turns the corner and registers positive growth. The inaction and ineptitude of the government give us no hope that we will see the light at the end of the tunnel any time soon," he added.

As expected, the only silver lining was the performance of the farm sector, which grew by 3.4% in the June quarter. Above-normal monsoon rain, improved availability of water in reservoirs for irrigation, robust kharif sowing, large procurement of foodgrain and robust rabi production seem to have provided support to agriculture growth.

Data separately released by the industry department showed the output of eight infrastructure sectors shrank 9.6% in July against a 12.9% contraction in June. Barring fertilizer production, which continued to grow for the third straight month in July, the output of all other sectors covered by the index contracted.

Most economists now expect GDP contraction in all four quarters of the current fiscal. They expect the economy to contract anywhere between 5% and 9.5% in FY21, the worst contraction since India gained Independence.

Demands for a fresh fiscal stimulus by the government have gained ground. The first set of economic measures announced by the government has so far heavily relied on liquidity support and government guarantee measures. The worryingly low revenue collections with little fiscal space to splurge have prevented the government from further expanding its fiscal support programme.

D.K. Srivastava, chief policy adviser at EY India, said the economy has clearly landed in a severe vicious cycle with the need for stimulating demand becoming paramount even as the capacity of the government to support demand is at its weakest. “Without stimulating private consumption and investment demand, it may be difficult to arrest this downward momentum," he added.

Data released by the Controller General of Accounts on Monday showed the government breached its full-year fiscal deficit target for FY21 at 103% in July itself against 77.8% a year ago, as it maintained the pace of expenditure at last year’s level amid revenue shortfall. While the finance ministry has dropped hints of more fiscal measures, including through deficit financing, it has not yet revealed the extent of the support and when it plans to do so.

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