With two successive quarters of decline in the gross domestic product (GDP), India on Friday officially entered a technical recession, but the gloom seems to be finally lifting. Reason: The economy did better than most estimates in the second quarter of the fiscal year as the contraction in GDP moderated from 24 per cent in April-June (Q1) to 7.5 per cent in July-September (Q2) over the previous year.
The GDP contraction printed better than the estimate of the Monetary Policy Committee (-9.8 per cent) and the RBI’s Nowcast (-8.6 per cent). The number was also better than other estimates, which ranged from a 7.8 per cent contraction estimated by Bank of America to a 12.7 per cent decline assessed by the National Council of Applied Economic Research (NCAER).
Though India witnessed the fastest rise in Covid-19 cases in Q2, the “Unlock” phase, wherein most restrictions were relaxed to let economic activity pick up, seems to have helped the economy contain the fall in Q2. As a result, in the first half of FY21 (two quarters), the economy contracted 15.7 per cent.
As expected, agriculture held up yet again, clocking a growth of 3.4 per cent for the second consecutive quarter. But the real surprise was manufacturing. The gross value added of manufacturing showed a growth of 0.6 per cent against expectations of a sizeable contraction, the official data released on Friday showed.
Some experts were however not convinced. “This manufacturing growth needs to be taken with a pinch of salt, because it is on a low base as Q2 FY20 had witnessed negative growth of 0.6 per cent,” said Sunil Kumar Sinha, principal economist, India Ratings.
Government spending declined, putting a drag on the economy rather than a boost, and consumer spending remained substantially muted and mild compared to the strong numbers exhibited by pent-up consumer demand in Q1.
A 22 per cent decline in government spending reflects a weak fiscal stimulus, experts said. The government, on its part, raised the fiscal stimulus bar in Q3.
“Weak government demand, indicating a weak fiscal stimulus, kept the positive manufacturing performance in 2QFY21 subdued. Having said that, the growth momentum is expected to pick up in Q3, and would turn strongly positive in Q4,” said D K Srivastava, chief policy adviser at EY India.
Investment in the economy, represented by gross fixed capital formation (GFCF), continued to decline, but the pace of contraction reduced significantly to 7.3 per cent in Q2.
In Q1, investment had declined by a massive 47 per cent owing to the lockdown.
Though pent-up demand and festive sales lifted consumer sentiment, private final consumption expenditure (PFCE), which represents consumer spending in the economy, declined 11.3 per cent from the previous year. PFCE forms the biggest part of GDP, occupying 57-60 per cent of the economy.
Services continued to decline in July-September; and, in some areas, showed a decline that was more severe than that in April-June. Overall, business in the sector, excluding construction, fell 10.8 per cent in Q2.
Among the sub-sectors, trade, hotels, transport, and communication were the worst affected, declining at 15.6 per cent, followed by public administration and defence, where the value added contracted by 12.2 per cent.
Value added in construction, another employment-intensive sector, fell 8.6 per cent.
Apart from the surprise seen in manufacturing, experts also noted the data concealed informal sector activity, and that manufacturing growth should be read with caution.
Net exports, which also add to GDP, remained positive for a second consecutive quarter.