1 min read.Updated: 27 Nov 2020, 06:35 PM ISTLivemint
An output contraction of just 7.5% in the July-to-September period this year, after a near-24% crash the previous quarter, suggests a steeper recovery path than feared
India’s gross domestic product (GDP) contracted by 7.5% in the July-September quarter, which is not as bad as the 8.6% contraction predicted by our central bank’s “nowcast" model, and much less worrisome than the double-digit shrinkage some global analysts had projected. This decline comes on the back of a nearly 24% scrunch-in officially recorded in the first quarter of 2020-21, the period that bore the brunt of India's covid lockdown. With two successive quarters of shrinking output, it's now official that our economy was in a technical recession during the first half of this fiscal year.
Yet, output figures for the first and second quarters offer a sharp enough contrast for some of our gloom to lift. At this rate of recovery from the depths plumbed earlier, hopes have strengthened that our economy will exit its contraction mode in the current quarter. Consumer demand has been observed to be showing signs of revival in recent months. Supply chains, snapped off by covid curbs, have been restored to a large extent. High-frequency indicators, such such as fuel and electricity consumption, apart from rail freight and mobility, have looked up. And festive season sales were buoyant, though much of the shopping could be attributed to a spring back of pent-up demand.
Order books in the manufacturing and service sectors have also made for optimism that the third quarter might mark an end to the recession. But it would be too early to conclude that the economy is well on its way back. As RBI Governor Shaktikanta Das observed on Thursday, we must be watchful of demand. There's reason to fear that it may slump after the festive season is over. Economists have also warned of second-order effects of our recession. Households reeling under its impact would naturally compress expenditure, even as a precautionary cash preference goes up across the country. This would make it harder to achieve normalcy. Another risk is that of a second wave of corona infections arising, as has happened in the US, before a vaccination drive can squash the virus's spread. But for now, it would seem that the government's gradual recalibration of its clamps-versus-commerce trade-off was reasonably well calculated.