First economic contraction in 4 decades: India GDP shrinks 23.9% in Q1FY21

India’s economy contracted by 23.9 per cent in April-June -- the worst performance since quarterly measurement began in 1996 and probably the first contraction since 1980.

The lockdown and the consequent suspension in economic activities due to the pandemic were so massive that among a mix of advanced and emerging economies, India’s GDP contraction in Q1 FY21 was the worst.

Nominal GDP growth, too, contracted by 20.9 per cent in the quarter.

The damage visible across all areas of the economy was somewhat cushioned by two indicators.

Gross value added (GVA) in agriculture grew by 3.4 per cent over the first quarter of the previous year.

On the demand side, while consumer spending and investment declined massively, government spending grew by 16 per cent, the data released by the National Statistical Office shows. In addition, though exports fell 17 per cent, net exports (exports minus imports) turned positive at 2.1 per cent of GDP, due to relatively lower imports. In Q1 FY20, net exports were negative 3.4 per cent of GDP (due to higher imports).

Growth could have plummeted by 27-30 per cent in the absence of a good monsoon and enhanced borrowing by the Centre and states to spend on food security, public health care, employment schemes, and cash transfers, a preliminary analysis by Business Standard shows.

Economic recovery, which would help incomes grow and generate more jobs, appears to be longer than expected, experts said.

Private consumer spending, the bedrock that contributes more than half the Indian economy, got chipped by 27 per cent in Q1. But investment, represented by gross fixed capital formation (GFCF), contracted by 47 per cent, their worst fall to date.

GFCF, a key indicator of long-term growth in developing economies, has now contracted for four successive quarters.

The Central and state governments tried to stem the collapse by spending more, and, as a result, government expenditure grew 16 per cent.

Among economic sectors, value added by industry saw a contraction of 40 per cent, which was expected. The services sector, which includes construction, trade, banking and financials, and real estate and restaurants, faced a near 27 per cent decline in GVA over the previous year.

Favourable crop sowing in the country perked up farm production estimates, and lifted the June quarter GDP.

The Confederation of Indian Industry (CII), in a response to the official data, said localised lockdowns, being imposed by state governments and district administrations, might be avoided to keep economic recovery on track.

The central government attributed this to factors out of its control.

“Economic performance in April-June is primarily due to an exogenous (an external cause) shock that has been felt globally,” Chief Economic Advisor K V Subramanian told reporters. 

He said the government hoped for a V-shaped recovery soon. 

“Core sector output, rail freight, and power consumption are coming back to their levels in the previous year. E-way bills are nearly back to their 2019 levels in August,” he said.

CII Director General Chandrajit Banerjee said: “We can expect a recovery in the second half of the financial year, led by supportive fiscal and monetary policies.”

Many experts said the contraction was more than expected.

“The print indicates the trough in the economy was much lower than expected and the pickup will likely be more elongated,” said Suvodeep Rakshit, vice-president, Kotak Securities. 

D K Srivastava, chief policy advisor, EY India, said in a note: “The Indian economy has landed in a severe vicious cycle with the need for stimulating demand becoming paramount while the capacity to support demand by the government is at its weakest.”

“With nominal GDP showing negative growth, tax revenues are also likely to contract sharply in the year as a whole,” he added.

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