GDP numbers reinforce belief that economy is headed for recession: Analysts

The gross domestic product (GDP) numbers for the January – March 2020 quarter (Q4FY20 / Q1CY20) has reinforced the belief that the Covid-19 hit Indian economy is indeed headed towards a recessionary phase. Economic growth in India as measured by the GDP grew at 3.1 per cent in the January – March 2020 quarter – the slowest growth in at least eight years, official data showed on Friday. The headline number for the full FY20 financial year came at an 11-year low of 4.2 per cent versus 6.1 per cent in FY19.

“Higher-than-expected growth in Q4FY20 should not be viewed with relief, as this data is constrained by the availability of earnings in many sectors, and is thus subject to considerable downward revision at a later stage in our view, especially for manufacturing and construction. We expect the pace of contraction in the GVA of manufacturing and construction for Q4 FY2020 to be sharply revised downwards when earnings data becomes available and the impact of the lockdown on profitability can be incorporated,” said Aditi Nayar, principal economist at ICRA.

Most economists had expected the growth to come in much lower. While estimates varied across brokerages and economists, the common thread that ran through the estimates was the fact that the economy is headed towards a recessionary phase.

“GDP growth for the January-March quarter and FY20 came in lower than our forecasts of 3.6 per cent and 4.7 per cent. The impact of lockdown for one week in March was clearly sharper-than-expected. There were revisions in the nine-month growth figures, which brought down the overall number. The CSO has pointed out that there would be further revisions and hence these numbers are to be treated as provisional as complete data collection was not possible,” said Madan Sabnavis, chief economist at CARE Ratings.

As regards the FY20 figures, Acuité Ratings & Research believes the data reflects the intensification of the economic slowdown that started to build up from Q2/Q3FY19. The growth momentum, they believe, got further dampened due to the economic disruption from the virus outbreak that started a couple of weeks before the onset of the pan-India lockdown in the last week of March.

“While the decline in growth of private consumption to 5.3 per cent in FY20 was somewhat expected, the larger worry is the decline in gross fixed capital formation at 2.8 per cent as compared to a growth of 9.8 per cent in the previous year. The contraction in exports at 3.6 per cent vis-à-vis 12.3 per cent in the previous year also highlights the stress in the external sector,” said Suman Chowdhury, chief analytical officer at Acuité Ratings & Research.

Delayed recovery?

With the government set to announce the roadmap over the weekend for on how it plans to deal with the lockdown, any extension, analysts say, could further dent the economy and chances of a V-shaped recovery. There needs to be a lead time of two – three months before economic activity can reach a reasonable operational level of even 50 per cent of pre-Covid-19 times, they suggest.

“At present, we have assumed that the lockdown will be lifted within Q1FY21, based on which the trajectory of GDP indicates a V-shaped recovery. However, if there is a second wave of infections that forces subsequent lockdowns either in India or globally, the ensuing demand uncertainty and supply chain hiccups could result in a W-shaped economic cycle, the inflection points of which can’t be gauged at this stage,” ICRA said.

Those at Barclays, too, believe the downward revisions in historical GDP numbers for FY20 show that the economy was already much weaker than numbers exhibited initially, and the COVID-19 outbreak will likely create material damage to an already fragile economic set up.

“We should also expect the long period of lockdown, which began in late March, and is now in its tenth week, to have a tremendous economic impact. The 38 per cent y-o-y decline in infrastructure index for April is a precursor of things to come, and indicates again that economic activity looks likely to contract by an unprecedented magnitude in April-May. For now, we retain our projection of zero per cent GDP growth for calendar year 2020, but see material downside risks to our projections,” said Rahul Bajoria, chief India economist at Barclays.