Indian economy likely contracted 10.2% in the July-September quarter, experts say

NEW DELHI: The Indian economy likely contracted 10.2% in the July-September quarter from the year earlier according to the median estimate of 10 economists and experts polled by ET, which would be a substantial improvement from the 23.9% decline in the June quarter due to the Covid-led lockdown.

It’s also an advance from the 12% median estimate in poll ET conducted in September as the economy picked up pace toward the end of the second quarter. At a contraction of 10.2% from the year earlier, the implied sequential growth from the first quarter would be 57%.

The latest estimates of the contraction ranged from 8% to 13.5% as agriculture and manufacturing propped up growth, aided by favourable government policies, while the services sector lagged behind on account of continued restrictions and consumer caution, independent economists said. The government is expected to announce second-quarter GDP figures at the end of this month.

“The pace of contraction in GDP is likely to have more than halved in Q2 FY2021 as compared to Q1 FY2021,” said ICRA principal economist Aditi Nayar, adding that growth during the quarter was led by electricity within the industrial sector followed by mining and manufacturing. ICRA has estimated a second-quarter contraction of 9-10%. Industrial production expanded 0.2% in September, reversing six months of contraction with mining and electricity growing 1.4% and 4.9%, respectively.

The Purchasing Managers’ Index (PMI) rose to the highest in eight-and-a-half years in September and goods and services tax (GST) collections rose to a post-pandemic high of Rs 95,480 crore.

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Tackling supply issues helped

September also saw record e-way bill generation at 57.4 million.

While demand remained constrained, the removal of supply side restrictions drove growth, according to Rahul Bajoria, chief India economist at Barclays, estimating an 8% contraction in the second quarter.

“Since August, India’s recovery is happening largely because the supply constraints that were very debilitating were removed and activity suddenly picked up,” Bajoria said. While October saw improvements, pent-up demand combined with a festive season upsurge drove growth toward the end of the second quarter, said Pronab Sen, former chief statistician of India. He projected a 5-8% contraction in the September quarter.

“The level of economic activities in July and August were not very different from June,” said DK Pant, chief economist at India Ratings and Research, pegging the September quarter contraction at 11.9%. “It was only in September that economic activities have shown significant improvement.”

The uptick in the July-September period and evidence of further acceleration in October and November triggered upgrades in FY21 GDP estimates.

Capacity utilisation low

Goldman Sachs said Tuesday it expects India’s economy to shrink 10.3% in FY21, compared with a 14.8% contraction it projected in September. While agriculture fared comparatively well, floods in many parts of the country disrupted the farm sector. The shortage of migrant labour resulted in patchy recovery in the construction sector, according to M Govida Rao, chief economic advisor at Brickwork Ratings.

“Although the relaxation of the lockdown resulted in an improvement in economic activity to some extent, the capacity utilisation continued to be low,” Rao said, estimating second-quarter shrinkage at 13.5%.

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“The important thing is for six consecutive months we are seeing negative growth,” said Madan Sabnavis, chief economist at CARE Ratings. “But this is very much on expected lines given that it was a manmade lockdown.” The gradual pace of recovery is due to the calibrated lifting of restrictions, he said. The agency expects a 9.9% contraction in the second quarter.

RBI played key role

HDFC Bank estimated the second-quarter contraction at 11% while State Bank of India Research pegged it at 10-10.5% with a downward bias.

While most economists agreed that the Reserve Bank of India (RBI) played its part in terms of providing support through monetary policy during the quarter, they felt fiscal policy was lacking. The government last week announced a Rs 2.65 lakh crore stimulus package – the third in the series – to provide a boost to the Covid-hit economy.

Although a major stimulus was not called for in the second quarter, Sen said the government should have made its intentions clear and announced the steps it was going to take to provide some assurance to various sectors of the economy.



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