Analysts revise Q2 GDP projections, are divided on sharpness on contraction

As Q2 will be the second quarter of economic contraction, India in all probability has entered a technical recession for the first time since quarterly GDP data began being compiled

Rating agencies and economists are unanimous in predicting a fall in India’s gross domestic product (GDP) in the second quarter (Q2) even as they differ on the rate of contraction, with the highest decline pegged at 12.7 per cent and lowest at 8.5 per cent.

Rating agency ICRA on Thursday lowered its projection for contraction in the economy to 9.5 per cent for Q2 of the current financial year (Q2FY21) from its earlier forecast of an 11-12.5 per cent fall. SBI Research pegged the contraction at 10.7 per cent. 

The economy declined by an unprecedented 23.9 per cent in Q1 as the government imposed a nationwide lockdown in March-end to stem the spread of the Covid-19 pandemic.

On the other hand, Barclays expected a sharper contraction of 8.5 per cent in Q2 against its earlier estimate of 8 per cent. It attributed this to marginally weaker incoming data than it had anticipated. Also, Dun & Bradstreet now projects GDP to fall 9.9 per cent against its earlier estimate of a 5.5 per cent fall.

Among others, CARE Ratings sees GDP falling 9.9 per cent, India Ratings 11.9 per cent and the National Council of Applied Economic Research (NCAER) expects a contraction of 12.7 per cent. CRISIL chief economist said the contraction is likely to be in high single digit in Q2 against the agency’s earlier estimate of 12 per cent. The official data for Q2 is scheduled to be released later this month.

ICRA attributed its new projections, less gloomy than earlier, to a pick-up in activities in manufacturing, construction and services. 

Aditi Nayar, principal economist at ICRA, said, “A substantial recovery in manufacturing and construction is likely to underpin the expected improvement in the performance of the industrial GVA (gross value added) in Q2.”

ICRA now forecasts GVA to decline 8.5 per cent in Q2 against its earlier estimates of a 10-11.5 per cent fall. “Various sectors of manufacturing recorded an improvement in demand and volumes in Q2, although the performance was admittedly uneven. In addition to the continued cost-cutting measures, the availability of raw material inventory, that had been procured previously at subdued costs, supported the earnings of the manufacturing entities in the just-concluded quarter relative to Q1,” she said.

She expected the contraction in manufacturing GVA to narrow down considerably to around 10 per cent in Q2, from 39.3 per cent in Q1. She, however, said the extent of the recovery in the performance of the informal sectors in Q2 remains unclear, cautioning that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors.

The rating agency highlighted that the robust recovery in the performance of key inputs of construction such as cement and steel, and healthy central government awards in roads and railways during Q2 stood in contrast to the contraction in the outgo towards capital spending by the government and the private sector.

ICRA expected the contraction in construction GVA to narrow to around 12 per cent in Q2 from 50.3 per cent in Q1.

It expected the GVA of electricity, gas, water supply and other utilities to grow by 2 per cent in Q2 in contrast to the contraction of 7 per cent in Q1. “This may be the only sub-sector apart from agriculture, to record a yearly rise in the second quarter,” Nayar said.