State of the economy: Entering technical recession but recovering

India witnessed a moderation in economic contraction in the July-September quarter, compared to the previous one. As data for the first two quarters have been released, it is worthwhile to take a look at how the economy performed in the first half (H1) of financial year FY21.

The Covid-19 pandemic chipped away nearly one-sixth of India’s real output in H1, as chart 1 shows. Only a few other economies such as the UK and Mexico faced a jolt this strong. Although we attribute the current economic situation to Covid-19, it is important to remember that the slump began as early as in H2 FY18. Even at that point, the growth rate had improved due to the low base effect of demonetisation in H2 FY17. Covid-19 has only exacerbated a continuing slump.

It is, therefore, important to look at the previous half (H2 FY20). Manufacturing and construction faced contraction well before Covid-19 hit the Indian economy, as chart 2 reveals. In H1 FY21, the loss in value-added was one-fifth in manufacturing, one-sixth in services, and nearly a third in construction.

But as the economy faced these headwinds, the tailwinds, too, were weak in H1. Chart 3 shows that as consumers slowed their spending due to the lockdown and risk aversion, government expenditure also declined by 4 per cent.

Further, investment has witnessed a continuous decline. Gross fixed capital formation fell by 28 per cent in H1 FY21, compared to an expansion of 12 per cent in H1 FY19, shows chart 4. GFCF now occupies a considerably smaller share in GDP than before.

Chart 5 takes stock of actual spending by the Centre and states. The Centre’s fiscal support was weak in Q2 compared to Q1, while the states increased spending in Q2. Both would need to contribute more fiscally in the second half to ensure that growth turns positive soon enough.

Finally, the first half of FY21 also saw rising consumer price inflation as the economy opened up, chart 6 shows. Goods and services in the wholesale market, too, recovered from disinflation.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines