The contraction in the Indian economy in the June quarter could be one of the worst among the G-20 countries, weighed down by the coronavirus pandemic and the severest of lockdown that led to halt in business activities and a sharp fall in consumer demand.

The National Statistical Office (NSO) will release the GDP data for the April-June period of FY21 on Monday, which is expected to be the worst print since India started reporting quarterly data in 1996.

So far, the UK economy has seen the biggest slump in June quarter GDP among the top 20 economies of the world, with a 21.7% year-on-year plunge – its deepest recession on record.

India’s nationwide lockdown began on 25 March and continued till end of May after which mobility restrictions were gradually lifted beginning 1 June. While April and May are considered washouts for most businesses, pent-up demand boosted consumption somewhat in June, though well below pre-covid levels.

Abheek Barua, chief economist at HDFC Bank, said he expects GDP growth to contract 21% in June quarter compared with a growth of 3.1% in the March quarter. “Manufacturing is likely to witness the sharpest slowdown, followed by services based on high frequency indicators. On the other hand, the only support to growth is likely to come from the agricultural sector that was relatively insulated from the impact of the virus. We estimate that the contraction in GDP would be close to 25%, if we exclude agricultural activity in Q1 FY2021,” he said.

However, the State Bank of India, in a report released, last week said June quarter GDP print could positively surprise the market due to better-than-expected corporate performance. “In principle, revenue decline of listed companies has been far outstripped by cost rationalisation, thereby not impacting margins. As per our estimates, Q1 FY21 real GDP de-growth would be now around –16.5%,” it added.

High frequency indicators such as index of industrial production (IIP), PMI manufacturing, auto sales, among others, contracted sharply during the June quarter. IIP contracted by an average 36% during April-June, while commercial vehicle sales contracted 84.8% during the same quarter.

The only silver lining in the data could be performance of the farm sector which is expected to register a growth of 3-4%. Favourable monsoon, improved availability of water in reservoirs for irrigation, robust kharif sowing, large procurement of food grains and robust rabi production are likely to provide support to farm growth.

However, data unavailability could mar the credibility of GDP numbers. NSO didn’t officially publish factory output figures for April and May, citing data issues as majority of industrial establishments were not operating in these two months due to preventive lockdown measures.

Pranjul Bhandari, chief India economist at HSBC, has advised caution in interpreting June quarter GDP data as absence of informal sector data in the initial estimate by NSO could result in some overestimation.

“We believe that the pandemic is likely to have hurt the informal sector more acutely as it comprises smaller firms with limited economic buffers to withstand shocks. And if formal sector data is taken to proxy informal activity at such a time, GDP can potentially be overestimated. The statistics office could announce GDP contraction of 17.5%, which could subsequently be revised to a 25% contraction when the informal sector survey is available,” Bhandari added.

News Source: Livemint


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