Indian economy likely to contract by 16.5% in Q1FY21: SBI report

Based on the leading indicators YoY performance, we expect the gross value added (GVA) de-growth to be between -14.5 per cent and -16.5 per cent in Q1FY21, says Soumya Kanti Ghosh of SBI

The Indian economy may report a contraction of16.5 per cent in April-June quarter of FY21, as against previously expected contraction of 20 per cent, as degrowth in corporate GVA, courtesy better-than-expected results of some financial and non-financial companies, has been significantly better than revenue degrowth in Q1FY21, said economists at India's largest public sector bank State Bank of India (SBI). 

"In May, we had indicated that the Q1FY21 GDP growth will exhibit a sharp decline at least in excess of 30 per cent. However, the current situation warrant us to revisit our GDP growth...  In principle, revenue decline of listed companies has been far outstripped by cost rationalisation thereby not impacting margins. As per our estimates, Q1FY21 real GDP degrowth would be now around –16.5 per cent," Soumya Kanti Ghosh, chief economic advisor for SBI wrote in his latest report Ecowrap, dated August 17. The government is expected to release Q1FY21 GDP data on August 31.

Based on the composite leading indicator (CLI), which is a basket of 41 leading economic indicators, Ghosh deduces that the economic activity is showing early signs of turnaround. "Out of the 41 high frequency leading indicators, 11 reveal a significant decline in Q1FY21, except in domestic Tractor Sales, Bitumen Consumption and ASCBs bank deposits... Based on the leading indicators YoY performance, we are also expecting the gross value added (GVA) degrowth to be between –14.5 per cent and -16.5 per cent in Q1FY21," he says.

Data released by the government last week showed that India’s factory output contracted sharply for the fourth straight month in June, though at a slower pace than in May, signaling gradual process of normalisation of manufacturing activity. Data provided by the National Statistical Office showed the index of industrial production (IIP) contracted 16.6 per cent in June as against 34 per cent contraction in May. During the June quarter, IIP contracted 35.3 per cent, which may heavily weigh on GDP growth for that quarter. 

"On a month-on-month basis, activity continued to pickup across all categories. Consumer non-durable production showed the sharpest pick-up and was the only category in positive territory – rising to 14 per cent YoY in June vs -11.1 per cent in May, mainly reflecting higher production in the essentials basket of pharmaceuticals (up 34.6 per cent YoY in June), food products (-2.6 per cent), but also tobacco products (4.5 per cent). Others components remained in a deep contractionary zone, but have also incrementally improved, with a faster sequential rebound in segments that were the worst hit in April. Of the 23 major manufacturing sub-segments, only three continued to contract in excess of -50 per cent YoYcompared with 15 in May, again reflecting the broad-based normalisation," wrote Sonal Varma, managing director and chief economist at Nomura, in a co-authored note with Aurodeep Nandi.

They expect the GDP growth to contract by 15.2 per cent YoY in Q2, and an average of -4.2 per cent in H22020, dragging overall growth by -5.0 per cent in 2020.

State-wise GDP

According to Ghosh, as the Covid-19 outbreak spread across the densely populated rural India, all the four quarters of FY21 are likely to exhibit negative real GDP growth while decline of full year growth could be in double digits.

Using the bottom-up approach, Ghosh estimated output loss in each state according to level of activity which are then added for the overall GDP loss. "We estimated that total GSDP loss due to Covid-19 for states stands at Rs 38.0 lakh crore, which is 16.9 per cent of total GSDP. State-wise analysis indicates that top 10 states accounted for 73.8 per cent of total GDP loss with Maharashtra contributing 14.2 per cent of total loss followed by Tamil Nadu (9.2 per cent) and Uttar Pradesh (8.2 per cent). These top-10 states have accounted for around 81 per cent of total confirmed Covid-19 cases in India... Subsequently, the per capita loss for all India is around Rs 27,000 with states like Tamil Nadu, Gujarat, Telangana, Delhi, Haryana, Goa, etc. exhibiting loss of more than Rs 40,000 per person in FY21," he says.

In the last 15 days, India has reported 10 lakh cases of Covid-19. India now accounts for 10.40 per cent of all active cases globally (one in every 10 active cases), and 6.50 per cent of all deaths (one in every 15). India has recorded 57,981 coronavirus cases in the past 24 hours, taking its total to 2,651,290, data provided by Health Ministry shows. With over 961 fatalities reported on Sunday, the country's death toll has surged to 51,079.