The Ministry of Statistics and Programme Implementation (MoSPI) will, on August 31, announce the initial official estimates of India's economic growth (GDP figures) for the April-June quarter (Q1) of 2020-21. The unanimous prediction by experts is that the year-on-year contraction in GDP growth could be anywhere between 16 and 25 per cent.
They believe that the next three quarters of the current financial year will be better, thereby reducing the severity of the sharp fall in economic growth expected in Q1. The experts also agree that one sector - agriculture - will buck the trend and post grow despite the COVID-19 triggered economic mayhem that has impacted every other segment of the Indian economy. Is the pessimism over Q1 GDP justified? Also, can we be optimistic about the next nine-month period of 2020-21?
Let's first see why experts are worried about the Q1 performance. It's common knowledge that the entire economy, barring essential services, came to a near-complete halt during the March to May lockdown period.
More specifically, sectors like manufacturing, construction, trade, hotels, transport and communication sectors, which account for almost 45 per cent of the country's GDP, are yet to recover from shutdown during the Q1 duration.
This is precisely why rating agency ICRA says the 'lockdown' quarter will see a contraction in Indian GDP and gross value added (GVA) at basic prices in year-on-year (Y-o-Y) terms at around 25 per cent each. The sectors mentioned above, ICRA says, will be the worst hit. "We expect the manufacturing GVA to contract by 40-45 per cent in Q1 FY2021," Aditi Nayar Principal Economist, ICRA Ltd says. ICRA expects a sharp contraction in the GVA of construction of around 45 per cent, and a contraction of 50-55 per cent in the GVA of trade, hotels, transport, communication and services related to broadcasting in the (Q1) quarter.
The agency's overall estimates would have been much more negative had it not been expecting government expenditure and agricultural production to remain positive and cushion the overall impact.
"The revenue expenditure of a small set of state governments for which data is available, expanded by 18.5 per cent in Q1 FY2021. This, coupled with the 9.7 per cent growth in the government's non-interest revenue expenditure in Q1 FY2021, would support the overall economic performance in that quarter," ICRA says.
Additionally, "driven by the healthy rabi harvest, we expect the growth of agriculture, forestry, and fishing to rise to 5.0 per cent in Q1 FY2021 from 3.0 per cent in Q1 FY2020," Nayar adds.
Another rating agency, India Ratings and Research (Ind-Ra), also points out the severity of COVID-19-led business disruptions to predict a negative growth of 17.03 per cent.
It could have been worse, says Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India. There was a time in May when Q1 growth was expected to decline in excess of 30 per cent, he says.
Ghosh estimates that things have improved a lot due to the better than expected financial results of several corporates. "As per our estimates, Q1 FY21 Real GDP de-growth would now be around -16.5 per cent", he says, adding that apart from 'Agriculture, Forestry & Fishing', 'Electricity, Gas, Water Supply & Other Utility Services', and 'Public Administration, Defence and Other Services', almost all other components of GDP will exhibit a declining trend.
The contraction for the whole year of 2020-21 may not be as bad as the first quarter, but a double-digit contraction seems likely. Not everyone is sticking their necks out due to the unpredictability of the COVID-19 pandemic.
For instance, the Reserve Bank of India (RBI)'s Monetary Policy Committee (MPC) expects GDP growth for the current year to be 'negative', without giving any ballpark estimates. That is because an early containment of the COVID-19 pandemic may impart an upside to the outlook, while a more protracted spread of the pandemic, deviations of monsoon from the forecast of a normal and global financial market volatility remain key downside risks.
SBI's Ghosh says that when India first imposed the lockdown, its GDP estimate for FY21 was 2.6 per cent, which has progressively reduced since then to a negative 6.8 percent.
Ghosh states that the situation has changed drastically after India climbed to 3rd position in overall COVID-19 cases in the world. Stating that the decline of full-year growth will likely be in double digits, he wants to see what the official data forecast will be on August 31.
The biggest unpredictability of the official GDP estimates expected on August 31 is the data on which it bases its assumptions. The problem began in March at the time of the previous quarterly GDP number release and had peaked during the lockdown in April and May.
As the MoSPI noted, while announcing the provisional GDP estimates for the last quarter (January-March 2020) of the previous financial year on May 29, 2020, the global COVID-19 pandemic and consequent nationwide lockdown measures implemented since March had impacted the data flow from the economic entities.
"As some of these units are yet to resume operations and owing to the fact that the statutory timelines for submitting the requisite financial returns have been extended by the government, these estimates are based on the available data. Consequently, the estimates (quarterly as well as annual) are likely to undergo revision," the Statistics Ministry had cautioned.
This applies to the current quarter as well, thereby making official GDP estimates highly susceptible to later revisions.
One data point, though, is clear. Agricultural production, which contributes to less than 20 per cent of India's GDP, is likely to be strong in the coming months too.
India's Kharif crop sowing has so far been satisfactory. Storage in 123 reservoirs in different parts of the country was 102 per cent in the corresponding period of the last year as well. Sufficient monsoon rains and yet another bumper crop that follows a record sowing season will remain a hope in an otherwise gloomy situation. Ministry's GDP projection will reflect that too.
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