GDP Contraction: Experts Hope For Immediate Measures from Govt, RBI
The industry said the steep 23.9 per cent contraction in the GDP in April-June quarter was on expected lines reflecting the "stalling of economic activities" due to the lockdown imposed in response to coronavirus pandemic. That is precisely the point made by the government and its finance ministry just a couple of days ago. What else can they say, one may argue? Sangita Reddy, President, FICCI said, “The sharp plunge in quarter-1 GDP growth numbers was anticipated. However, the magnitude of the contraction has indeed come as a surprise."
As expected, India's Chief Economic Adviser (CEA) K V Subramanian attributed the contraction to the lockdown due to the corona virus pandemic. "The country will witness better performance in the subsequent quarters aided by a V-shaped recovery across several sectors," he said. His confidence stems from indicators like rail freight traffic and electricity consumption showing marked improvement, a positive sign of growing economic activity.
Meanwhile the former FM P Chidambaram, in a virtual press conference, accused the central government of failing to "do anything to cushion" the fall in economic growth.
As per the government data, the manufacturing sector contracted by 39.3 per cent whereas the figures for mining showed a decline of 23.3 per cent. The growth in the trade and hospitality industry showed a 47 per cent contraction while it was negative 50 per cent for construction. The only segments which recorded positive growth were agriculture, forestry and fishing at 3.4 per cent.
Interestingly, in its recently released documents, the Reserve Bank of India (RBI) had pointed that the country may see a "severe shock to consumption".
D K Srivastava, chief policy advisor, EY India said termed these latest GDP numbers as an "extremely challenging outlook" for the Indian economy. "The 1Q-FY21 GDP growth numbers highlight an extremely challenging outlook for the Indian economy with only one sector namely agriculture, showing positive growth on the output side, and only one demand segment namely, government final consumption expenditure, showing positive growth," he said.
FICCI President Sangita Reddy said these numbers only highlight the urgent need to take immediate measures to bolster demand in the economy. "We hope government and RBI will plan for the next set of fiscal and monetary measures and make these announcements soon,” said Reddy.
FICCI has suggested that the government may consider further measures like putting more money in hands of the vulnerable and weaker sections of the society. It said the government could also consider a temporary reduction in GST rates especially in consumer durables segment. "In fact, the festive season has already begun and some positive signaling by government might give a push to consumption activity. Specific announcements for hospitality, tourism, retail, and healthcare sector are eagerly awaited as well," Reddy said adding that a greater impetus to housing, infrastructure and auto sectors and support to state governments for purchase of buses for city transportation must also be considered.
“The Indian market is intrinsically strong and the option to raise money through international markets must be explored,” Reddy added.
Nikhil Gupta, Economist - Institutional Equities, Motilal Oswal Financial Services said India's real GDP declined 23.8 per cent YoY in Q1 FY21, the worst among major nations. "Worse than the consensus of 18 per cent fall, the real GDP decline is a shocker," he said.
What are the quick takeaways from the GDP numbers? The private consumption fell by 27 per cent while there was a decline of 47.5 per cent in the total investments for the April-June 2020 quarter. The real GVA declined 22.8 per cent YoY, of which services was the biggest surprise. 'Trade and transportation' fell by almost half, and 'public administration and defense' (which includes government spending and all else) contracted by 10 per cent last quarter.
There were some green shoots as well. The government consumption grew 16.4 per cent while the net exports posted highest surplus in real terms.
"Going forward, it appears that July'20 was worse than Jue'20 and the initial data for Augus'20 is also not very encouraging. There would be another contraction in Q2FY21; however, what needs to be seen, and as we have always feared, the turnaround from late CY20 could be much slower than the general expectations," said Gupta of Motilal Oswal Financial Services.
Making sense of this epic contraction in the GDP numbers, Joseph Thomas, Head of Research - Emkay Wealth Management said it was the direct consequence of the pandemic and the lockdown. "A fall close to negative 20 per cent was more or less expected by a number of market participants. Even with some improvement in the economic variables in the coming three quarters, the growth for the whole year would be around negative 5 per cent or slightly higher for the whole year," said Thomas. But he added that there was a strong probability of this number being revised given the fact that there have been practical difficulties around data collection and estimation on manufacturing and industries, and consumer prices.
"A demand or consumption-led recovery is crucial for the economy, and it may require measures by which the disposable income of people is enhanced," said Thomas.
Nish Bhatt, Founder & CEO, Millwood Kane International - an investment consulting firm with real estate at its core said he was hopeful that going forward, as the government re-opens the economy in phases, government spending, and festive season spending is expected to help the growth rate to be in the positive territory. "While the RBI has done its part to help boost consumption and economy, a further rate cut may help boost credit offtake. The government may still have some more fire-power with further stimulus measures for specific sectors. Good monsoon, high agri output will help with a pickup in rural consumption. Government spending, reforms, and more measures to boost consumption is required to bring back growth on track,” Bhatt said.
Rajani Sinha, Chief Economist & Head Research at Knight Frank India said, “The sharp fall in the first quarter GDP is on expected lines given that around 70-80 per cent of the economy was on a standstill in the first two months of this quarter. As expected Private Final Consumption Expenditure and Investments have contracted sharply in this quarter, while the positive agriculture growth has been the silver lining." Sinha said it was very important for consumer sentiments and consumer spending to improve for the economy to bounce back.
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