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COVID-19 impact: India's economy likely to contract 12% in Q1 FY22

This 12% contraction will have the economy missing a sharp V-shaped recovery this time around, unlike seen last year after the national lockdown was lifted, as consumer sentiment remains very weak this time

The economy had its worst contraction on record in FY21 at 7.3 per cent The economy had its worst contraction on record in FY21 at 7.3 per cent

Indian economy is likely to contract 12 per cent in the June quarter compared to 23.9 per cent contraction in the same quarter in 2020. This is due to the lockdowns imposed by the states in April and May to tackle the second wave of COVID-19 pandemic in the country, as per a brokerage report.  

India saw its worst economic contraction in FY21 at a record 7.3 per cent because the unplanned lockdown announced by the Centre crippled the economy.  The 23.9 per cent contraction in the first quarter, later, improved to -17.5 per cent in the second quarter.

However, the economy showed a sharp V-shaped recovery from the second half and posted a 40 bps positive growth. The economy clipped 1.6 per cent in Q4 and contained the overall contraction at 7.3 per cent for the year.

This 12 percentage point contraction will have the economy missing a sharp V-shaped recovery this time around, unlike seen last year after the national lockdown was lifted, as consumer sentiment remains very weak this time around as people are more worried about the pandemic than last year, says Swiss brokerage UBS Securities India.

Quoting in-house data from UBS-India activity indicator, Tanvee Gupta Jain, the economist at the Swiss brokerage, says the indicator suggests that economic activity has contracted an average of 12 per cent in the June 2021 quarter as against 23.9 per cent in June 2020 quarter.

This is despite the indicator rebounded to 88.7 in the week to June 13, up 3 per cent week-on-week after many states eased localised mobility restrictions from the last week of May.

Though the brokerage expects a sequential pick-up in economic activity from June, it believes that the economy may gain traction only from the second half.

Unlike the V-shaped recovery in 2020, we expect the economy to have only a gradual recovery this time, as consumer sentiment remains weak on pandemic-related uncertainties. That said, we expect economic recovery to gain momentum from H2 as we see vaccination ramp up and the resultant control of the pandemic lifting consumer and business confidence from them, she said.

The lockdown in the second wave lasted for slightly more than a month as against 2.5 months in the first wave and industrial/construction activities were allowed at a limited scale this time.

We still expect only a sequential pick-up in economic activity from June and not a V-shaped recovery as in 2020, she added.

Significantly, there is positive momentum on the ground on the vaccination front which has improved to 3.2 million doses daily in the week to June 13 from 2.5 million as of end-May.

(With inputs from PTI)

Also Read: Economy still wrestling with Covid; vaccination speed, scale to shape recovery path: RBI report

Also read: COVID-19 second wave impact on Indian economy not as bad as first, says RBI