Q1 GDP numbers just first instalment of a bad news story on economy

If not for the numbers on agriculture and government expenditure, the GDP growth print for the first quarter of 2020-21 would have been far worse

One way of assessing the extent of an unprecedented 24 per cent contraction of India’s gross domestic product (GDP) in the April-June quarter of 2020 is to note that only two of its constituents managed to stay in positive territory in that period.

Everything else collapsed.

Agriculture, riding on a healthy rabi output, grew by 3.4 per cent, higher than the 3 per cent increase recorded in the same period of 2019.

And government consumption expenditure grew by over 16 per cent in the first quarter of 2020-21, much higher than the 6 per cent growth seen in the same period a year ago. The spurt in government consumption expenditure could be attributed to a rise in government spending to mitigate the adverse impact of Covid-19.

It is obvious that if agriculture had not maintained growth and government final consumption expenditure had not been propped up by a significant margin, the GDP growth print for the first quarter of 2020-21 would have been far worse than the reported 24 per cent contraction.

Agriculture has in the last few years accounted for about 13 per cent of India’s GDP at constant prices. Thanks to every other sector collapsing and the farm sector growing, agriculture has seen a sharp rise in its share in GDP in the first quarter of 2020-21 to 18 per cent.

Similarly, government consumption expenditure’s share in GDP at constant prices has risen from about 12 per cent in the last few years to about 18 per cent in the April-June quarter of 2020.

The 39 per cent contraction in manufacturing, 23 per cent decline in mining and quarrying, 50 per cent fall in construction and 47 per cent drop in output in trade, hotels, transport and communication services are worrying.

But more worrying, particularly for the future, is the huge dip in the investment rate. After recording a 4.57 per cent increase in the first quarter of 2019-20, gross fixed capital formation fell by 47 per cent in the same period of 2020-21. As per cent of GDP, it fell from 32 per cent of GDP (at constant prices) last year to 22.3 per cent in the first quarter of 2020-21.

Even private consumption expenditure, which fuels the economy to a great extent, contracted by about 27 per cent in April-June of 2020, compared to an increase of 5.5 per cent last year. Since private consumption expenditure in the last few years has accounted for 56 per cent of GDP, its sharp fall now has serious implications for demand revival. Its share in GDP has also dropped to 54 per cent.

The GDP estimate, put out by the National Statistics Office (NSO), has been broadly in line with the expectations of the market and research outfits. They had all forecast a GDP contraction ranging between 15 per cent and 26 per cent. Fears of the NSO not capturing the full adverse impact of Covid-19 on the economy have largely been set at rest.

But the outlook for the GDP output in the second quarter may still remain sombre, with Covid-19 continuing to spread across the country and affecting the pace of economic activity. The Q-1 data on GDP is only the first instalment of the bad news story on the economic front. More can be expected in the coming months.