A Short-Lived Recession? Economists Weigh In On Q2 GDP Data

A second consecutive quarter of contraction pushed the Indian economy into a recession, as defined by two quarters of negative growth.

The recession, however, may prove to be short lived with economists pointing to the better-than-expected performance in the July-September period, which may help the economy contract less than earlier feared. Even so, economists say that the damage done by Covid-19 will remain visible in the level of GDP, which will take until the end of 2021 to overtake the pre-pandemic trajectory.

For the second quarter, GDP contracted by 7.5%, lower than the 8.5% median estimate by Bloomberg from a poll of 30 economists. The economy had seen a contraction of 24% in the April-June period.

Pro-Cyclical Boost To Growth Ahead

Neelkanth Mishra, India strategist at Credit Suisse, said that with better-than-expected data in the second quarter and likely support from government spending, contraction in the economy may be less than feared.

• Consensus FY21 forecasts are now likely to be upgraded. The current estimates of -9% FY21 growth implies -2% growth in the second half, which appears too low.
• If nominal GDP is down only 3-4%, the positive fiscal surprise should boost growth in the second half, adding to the restocking-led growth (reversal of de-stocking in FY20).
• On the other hand, the support to first half GDP growth from changes to trade balances can fade. But a slight drop here would be offset by higher private consumption spending and gross fixed capital formation.

Return To Growth In Q3?

A lower than estimated contraction in the second quarter could signal a faster return to growth, said Rahul Bajoria, chief India economist at Barclays

• While manufacturing production is showing a strong recovery for now, output is close to near-term highs, so we expect the strength here to likely moderate in the coming months, as inventory replenishment is likely over.
• Excluding agriculture and government spending, GDP fell by 8.1% annually in Q2, indicating that private sector activity is no longer significantly weaker than the farm or the government sector.
• If the recovery stays on track, we expect the economy to return to positive growth as early as Q3, a quarter ahead of the central bank’s current projections.

Separating the ‘Froth’

While the contraction of 7.5% was in line with the recent improvement in economic data, how sticky is it, asks Sreejith Balasubramanian, economist at IDFC AMC

• Economic data ahead would be crucial to gauge the quantum of ‘froth’ in this Q2 data from pent-up demand, festive and inventory restocking.
• More data is also needed to throw light on the employment and wage situation, the domestic Covid infection rate in the next few weeks and the situation in major export markets.
• Most important to see would be how flat the recovery leg eventually is and thus the hit to medium-term potential growth.

Rocky Road Ahead

Despite the positive surprise to GDP estimates lending an upward bias to GDP for the full year, recovery may remain uneven, said Aditi Nayar, principal economist at ICRA.

• Discouragingly, the pace of contraction of two sub-sectors—financial, real estate and professional services, and public administration, defence and other services—actually worsened in Q2 relative to the previous quarter, serving as a reminder that the path out of the pandemic may not be smooth.
• The extent of recovery in the performance of informal sectors in Q2 remains unclear and these trends may not get fully reflected in the GDP data, given the lack of adequate proxies.
• We foresee a stronger rebound in Indian economic activity in the second half of FY21, relative to our earlier assessment, with regional and sectoral unevenness in the pace of the recovery.

Government Expenditure To Remain Weak

Even after expenditure cuts, the government’s fiscal deficit rose to 114.8% of it’s target, said Sunil Kumar Sinha, principal Economist at India Ratings and Research. With weak growth, pressure on government finances will likely continue, he said.

• A combination of pent-up and festive demand played a big role in the second quarter.
• Manufacturing growth needs to be taken with a pinch of salt, because it is on a low base as the sector had seen negative growth in the second quarter of FY20.
• The decline of 22.2% in government expenditure is the sharpest since the fourth quarter of FY15. Perhaps with growth dwindling and revenue receipts weak, it was not possible for the government to sustain the expenditure.
• Going forward, government consumption expenditure will remain under pressure due to weak GDP growth.