GDP data: No surprises here; need different policy measures to stem the rot

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
The GDP growth number for the April-June 2020 quarter the fiscal year 2020-21 (Q1FY21) was expected to be dismal and the estimates varied from 15-30 per cent. The contraction of 23.9 per cent during this period is a clear reflection of the slowdown caused by the shutdown in March 2020, which was virtually total in April and opened only gradually in the subsequent two months.

The only sector to show growth is agriculture, while the government sector disappointed with public admin de-growing by 10.3 per cent.  Agriculture has been relatively immune to the lockdown and it is only post July when there has been more movement permitted across states that the Covid-19 infection has spread, albeit marginally. Therefore, it has been business as usual for this sector and with the Rabi harvest coming in has registered growth of 3.4 per cent.

The government accounts till June 2020 do reveal that revenue expenditure has been aggressive, especially covering the relief to the poor and NREGA programmes that gets reflected here. However, it is unfortunate that running a high fiscal deficit for the first quarter has not resulted in value accretion for GDP. This is something that the government needs to look at.

The other sectors have been in the negative zone, especially services, which have trailed due to the lockdown and the limited ability to operate in several states. Industrial activity comprising mining, manufacturing and power have all moved into the negative growth territory with the inter-linkages being distinct. Lower growth in manufacturing due to the lockdown and supply disruptions has lowered demand for electricity that gained more from residential consumption, and which, in turn, affected demand for coal and hence the mining sector. Construction was impacted by both the issue of stoppage of projects as well as migration of labour. This will get further constrained due to the seasonal factor of monsoon in the second quarter.

On the expenditure side, quite expectedly again, both the consumption and investment stories read alike. The lockdown went with job losses and salary cuts that affected consumption, which also gets reflected in these lower numbers. Also, the investment rate as denoted by the gross fixed capital formation (GFCF) number was down to 19.5 per cent from 28.9 per cent – one of the lowest witnessed in the last decade. Quite clearly, the lockdown impacted investment activity as it was physically not possible to continue with projects which came to an end – both public works and residential construction. Also, private investment was constricted with the lack of demand which did not provide an incentive to invest.

Looking ahead, the picture continues to be gloomy, with the caveat that the negative numbers will look better in the coming quarters. For the year, GDP contraction would be in the region of around 6.5 per cent, provided the Unlock programme gets smoother. The centre appears cognizant of the disruptions caused by localised lockdowns and has taken some action in this regard. With the unlock progressing without a major hitch, one may expect growth possibly in Q4 with the others witnessing progressively better negative growth rates.

There are expectations that the rural demand story plays out in Q3FY21 when the festival season starts and the Kharif harvest comes in. Presently, indications are that crop sowing is progressing well and output would be good. The crux is in farmers realising better prices and hence income. This must work out well as this is one factor India Inc is banking on as well. Also, the government action on extension of food relief or any additional stimulus will be awaited to turnaround this number.

Madan Sabnavis is Chief Economist at CARE Ratings. Views are personal.

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