By: Tavaga Research
The National Statistical Office (NSO) on August 31 released the official numbers of Gross Domestic Product (GDP) for the first quarter of this fiscal year. As per the released data, the economy contracted by 23.9 per cent YoY (-22.6 per cent inflation-adjusted) for the April-June quarter. The GDP result is against the targeted growth of positive 10 per cent in 2020-21 set during the budget approval. The silver lining here is that the unfavourable aggregates were in line with most estimates and expectations given the strict lockdown situations in most states of the country.
Key Highlights From The Data:
- Agriculture is the only sector that grew during the discussed period by 3.4 per cent
- Manufacturing, mining, and construction experienced a free fall contracting by 39.3 per cent, 23.3 per cent, and 50.3 per cent respectively
- Trade, hotels, transport, communication, and services related to broadcasting contracted 47 per cent
- Private consumption expenditure is 54.3 per cent of GDP (has dropped by 26.7 per cent)
- Investment demand plunged by 47 per cent
- Service sector experienced a contraction of approximately 21 per cent
- Government consumption expenditure increased to 18.1 per cent of GDP (previously 11.8 per cent)
- Net trade (import v/s exports) is a vital factor for calculating the GDP. For the first time in 16 years, this factor led to a boost in the GDP as exports exceeded imports to the extent of Rs 75,675 crores. However, this cannot be taken as a long-standing factor because the imports will pick up as soon as economic activity returns to its pre-pandemic potential
The agricultural sector has given way to the only efficacious highlight of this quarter’s GDP numbers. This sector is experiencing structural growth as the reported increase in the Kharif crops sown already is 7 per cent, an all-time high. The acreage is attributed to good rainfall and recent Government reforms towards the direction of formalising the rural economy. The rural sector is certainly expected to witness a spike in private investment that will eventually increase the disposable income of the farmers. The situation opens the door for the economy to capitalise on the momentum that the rural sector is experiencing.
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Following a constant decline trajectory in the manufacturing activity for five months, PMI data related to manufacturing activity stood at 52 in August as compared to the level of 55 in January. Higher customer demand has registered new orders. However, the idle time in factories can still prove to be a bottleneck as they are not functioning at their optimum given the state of the labour force who have been relocating as the pandemic takes its shape. The delivery time is bound to be affected that will foment to slower than awaited pick up on the business front, with the output being on the sluggish side of things.
GDP, the total value of goods and services in a country, is a blend of Government as well as Non-Government activity. Private consumption drives close to 50 per cent of the GDP. The economy this year suffered from supply shortfall in the first half since approximately 80 per cent of the country remained shuttered. Presently, the economy is undergoing a period of demand shock as households continue to avoid expenditure on the backdrop of low ability as well as sentiments.
How reliable are the estimates?
The Central Statistical Organisation(CSO) has also put forward the difficulties posed in collating data for the GDP, in wake of the disruptions caused; and have stated that they had to rely on proxies based on indirect variables such as GST collection and other customized indices, which may provide a better estimate of the economic impact caused.
Google mobility index has been used extensively as a proxy measure for various consumer activities. Google Mobility Index is used to measure visits to places like retail stores, bus stops, etc.
Given the lack of adequate gauges for economic activity and over-reliance on proxies, there might be a misrepresentation of data, especially for the informal sector.
Supply Vs Demand
GST revenue is a pretty good indicator of business & economic activity and serves as a doctor’s stethoscope for an economist trying to demarcate the point of concern. The GST revenue collected in July has been. 87,422 Crores, which is 14% lower than the GST collection a year back. E-Way bill generation is another good proxy for gauging the operational performance of the economy. While the April –July numbers wavered in the below 50% of the pre-COVID levels, August numbers show some respite with 80% of the pre-COVID levels.
There has thus been a faster rise in supply as compared to the demand and, relevant measures need to be rolled out the stimulate demand.
The markets earlier reacted negatively in anticipation of the GDP figures, with the Nifty 50 ending around 300 points lower(2.6%) after reaching an intraday high. Sensex crashing by around 839 points(2.1%) before closing on Monday afternoon.
International Trend of the Q1FY21 GDP Numbers
While the US GDP plummeted around 31.7% (according to official revised Federal Reserve estimates) on an annualised basis and declined by 1.8% on a quarterly basis during the April-June Quarter of 2020, which also happens to be its worst yet; the omnipresent impact on consumer demand and investment was felt across almost all the G-7 economies, with UK reporting a 20.4% contraction with respect to the Jan-March quarter (Office For National Statistics, UK), Germany around 10.1% on a quarterly basis with and Japan 7.8%; with all of them witnessing their worst quarterly performance till date.
The above infographic depicts the quarterly and annually seasonal adjusted GDP numbers for the G7 economies for Q2FY20, sourced from the Bureau of Economic Analysis, and Federal Reserve of St.Louis (FRED) database.
While China reported a YoY growth rate of 3.2% for Q2FY20 on the back of a much more relaxed business environment post the lifting of lockdown restrictions; its credibility is still under scrutiny. But, given its 6.8% contraction in the first quarter of FY20, the 3,2% growth commendable enough.
What Lies Ahead?
Going forward, as per the Government directions in light of the pandemic-struck economy, Q2 data (expected in November) is supposed to show signs of revival given that economic activity starts to make headway. Q2 number will also be notable as any signs of contraction in the current state will officially take the country into recession. Two consecutive quarters of negative growth is an indicator of recession. However, Q3 data is anticipated to be promising in the sense that economic activity, to be considered as a V-shaped recovery, should test pre-pandemic levels. Chief economist at the Ministry of Finance cheered for a V-shaped recovery stating that the coming quarters will reflect the pickup in rail freight, power consumption, and tax collections. An L-shaped recovery is not an option if India needs to be considered as the strongest of the emerging market economies and bag the opportunities in the looming as the global economy rebounds. The vital question that needs to answering is whether the Government will focus its resources on reviving consumption or boosting investments.