India’s Gross Domestic Product (GDP) growth contracted 23.9 per cent in the April-June quarter. This also marked its entry into a recessionary phase this year, data released by the National Statistical Office (NSO) showed. Construction, manufacturing and trade, hotels and transport were the worst-hit sectors, recording contractions of 50.3 per cent, 39.3 per cent and 47.0 per cent, respectively. This reflects the unprecedented suspension of economic activity in the first quarter of this fiscal due to the pandemic and the series of lockdowns that are only now beginning to unwind.
The April-June quarterly growth, which is the lowest growth rate since India started reporting quarterly data in 1996, had only agriculture sector posting a positive growth among the eight sectors at 3.4 per cent. The April GDP print is also worse that the 21.7 per cent contraction reported by the UK economy in the June quarter - the sharpest GDP contraction among the top 20 global economies so far.
The GDP growth in nominal terms, which takes into account inflation, also recorded a contraction of 22.6 per cent in April-June as against a growth of 8.1 per cent last year. Growth rate of Gross Value Added (GVA), which is GDP minus net product taxes and reflects the income side of national accounts, declined 22.8 per cent in the first quarter of this financial year as against 4.8 per cent growth in the corresponding period last year.
The data is expected to be revised further as it is based on limited data sources in view of the lockdown due to Covid pandemic, NSO said. “With a view to contain spread of the Covid-19 pandemic, restrictions were imposed on the economic activities not deemed essential, as also on the movement of people from 25 March, 2020. Though the restrictions have been gradually lifted, there has been an impact on the economic activities as well as on the data collection mechanisms. The timelines for filing statutory returns were also extended by most regulatory bodies. In these circumstances, the usual data sources were substituted by alternatives like GST, interactions with professional bodies etc. and which were clearly limited,” it said.
The real extent of the economic crisis is expected to be deeper given that the small-scale sector and informal sector is more affected than the organised sector, but is not reflected in the quarterly GDP numbers as factory output figures are used to extrapolate the trends in the informal sector.
Chief Economic Adviser Krishnamurthy Subramanian said the contraction in GDP is “primarily due to an exogenous shock” that has been felt globally. He attributed it to the Covid pandemic which has resulted in global lockdowns and India was in one in the first quarter, he said.
The contraction in the second quarter is expected to be shallower than the first quarter but has also not picked up as expected with various states announcing lockdowns in July and August. Moreover, rural recovery may be threatened by a surging Covid curve there.
The looming defaults in the banking sector after the moratorium ends is adding to the banking sector woes, which could compound concerns on lending. On top of this, are worries regarding household debt, with incomes stagnating, salary cuts and job losses.
Economists said the government needs to step up with more fiscal measures due to the higher multiplier effect. “Consumption weakness in the current cycle stems from weaker disposable incomes and uncertainty over employment prospects, rather than changes in the rate cycle. This suggests that fiscal push will carry a larger multiplier than purely easier financial conditions. Stimulus measures from the fiscal route might be in the shape of boost to purchasing power through cash support, reduction in direct/ indirect tax rates, higher infrastructure spending indirectly lifting demand, alongside direct aid to most affected sectors, including discretionary services,” said Radhika Rao, economist, DBS Bank.
