India in historic recession as GDP likely to contract 8.6% in Q2: RBI nowcast

Due to the lockdown caused by the coronavirus pandemic, India’s GDP in the April-June quarter had seen a steep contraction of 23.9%.
PM Narendra Modi and FM Nirmala Sitharaman
PM Narendra Modi and FM Nirmala Sitharaman

India’s GDP is likely to contract by 8.6% in the second quarter of FY21, meaning India has entered a technical recession in the first half of 2020-21 for the first time in its history, a series of articles by economists led by Reserve Bank of India’s Deputy governor Michael Patra said. A technical recession is when the economic growth, or Gross Domestic Product (GDP) of a country contracts for two quarters in a row.

For the full financial year, the economy is reportedly expected to contract by 9.5%. It is to be noted that due to the lockdown caused by the coronavirus pandemic, India’s GDP in the April-June quarter saw a steep contraction of 23.9%.

RBI has observed that while sales of companies contracted in the July-September quarter, expenses of these companies fell faster than sales resulting in a sharp rise in operating profits after two consecutive quarters of contraction.

These estimates were arrived at through a ‘nowcasting’ method used by these economists released in RBI’s monthly bulletin. Official data, however, will be released on November 27. “The estimates of the National Statistical Office (NSO) that are expected at the end of November 2020 will formally bear out the extent of improvement that occurred in the quarter gone by,” the bulletin noted.

There is, however, some recovery, the bulletin noted. RBI has said that while indicators of aggregate demand are still coming up, there are indications of a pick-up amid the festival season. Some indicators such as a 11.5% increase in electricity consumption, petrol and diesel consumption going from contracting so far to growing by 4% and 6.6% respectively, and a surge in sales of consumer durables, especially on e-commerce platforms show that there is a revival in domestic spending.

“Mirroring these indicators of the revival in domestic spending, collections under the goods and services tax (GST) broke through the Rs 1 lakh crore mark in October for the first time in the financial year, a 10.2 per cent increase y-o-y,” the article said.

The economists say that incoming October data has also stirred up consumer and business confidence. They predict that if this upturn is sustained in the coming two months, there is a strong likelihood that the Indian economy will break out of contraction and return to positive growth in the third quarter (October-December).

However, in the bulletin, economists caution by saying that there are still formidable downside risks that could impact the prospects of an economic recovery. The first is the rising pressure of inflation, which is showing no signs of waning despite supply management measures being put in place. These include imposition of stock limits on onion traders, imports of potatoes and onions (without fumigation) and a temporary reduction in import duties on pulses.

The second major risk to the economy, they say, is that the global economy now at risk from the second wave of COVID-19. “Should external demand collapse again as commodity prices seem to foretell, the recent recovery in exports could become stillborn,” economists wrote.

The third major risk, the article says, is intensifying stress among households and corporations, which could pill into the financial sector. “If the green shoots manage to survive these risks and take root, the key question is what will be the drivers of the recovery? We live in challenging times,” they said in conclusion to the article on the state of the economy.  

Rahul Gandhi hits out

Congress leader Rahul Gandhi on Thursday targeted the government over the state of the economy, claiming the country has entered into a recession for the first time in history due to the policies of Prime Minister Narendra Modi.

"India has entered into recession for the first time in history. Mr Modi's actions have turned India's strength into its weakness," he said on Twitter.

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