India’s recovery to take time after GDP shrinks 24% in first quarter

India’s economy shrank by nearly a quarter in April-June, much more than forecast and pointing to a longer than previously expected recovery with analysts calling for further stimulus.

Consumer spending, private investments and exports all collapsed during the world’s strictest lockdown imposed in late March to combat the COVID-19 pandemic and India — the world’s fastest-growing large economy until a few years ago — now looks to be headed for its first full-year contraction since 1980.

Gross domestic product shrank by a record 23.9% in April-June from a year earlier, official data showed on Monday, against a Reuters poll forecast for an 18.3% contraction.

Krishnamurthy Subramanian, chief economist at the Ministry of Finance, said India’s economy was set for a “V-shaped” recovery and should perform better in the coming quarters as indicated by a pickup in rail freight, power consumption and tax collections.

Some private economists, however, said the fiscal year that began in April could see a contraction of nearly 10%, the worst performance since India won independence from British colonial rule in 1947, and likely to push millions more into poverty.

“Given the limited fiscal space and the need to stimulate a more durable growth, the growth recovery will be gradual and is likely to continue into 1H FY22,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities, Mumbai.

Consumer spending - the main driver of the economy - dropped 31.2% year-on-year in April-June compared to a 2.6% fall in the previous quarter, data showed, while capital investments were down 47.9% compared to a 2.1% rise in the previous quarter.

Prime Minister Narendra Modi announced a $266 billion stimulus package in May, including credit guarantees on bank loans and free food grains for poor people, but consumer demand and manufacturing have yet to recover.

The Reserve Bank of India, which has reduced the benchmark repo rate by a total of 115 basis points since February, is expected to cut interest rates to boost growth after keeping them on hold this month amid rising inflation.

The coronavirus has been spreading in India faster than anywhere else in the world, with more than 3.6 million people already infected and a death toll of over 64,400.

Continuing restrictions on transport, educational institutions and restaurants have hit manufacturing, services and retail sales, while keeping millions of workers out of jobs.

Manufacturing has already entered recession as output fell 39.3% in April-June after falling 1.4% in the previous quarter, and construction and trade services plunged by around 50%.

With an annual growth of 3.4% in the April-June quarter, the farm sector, which accounts for 15% of economic output, offered some hope the rural economy will be able to support millions of migrant workers who have returned to their villages.

Still, Rupa Rege Nitsure, group chief economist at L&T Financial Holdings, said the government will have to take more steps to boost the economy overall.

“Unless the central and state governments focus on re-starting the economic machine completely, the real process of repair and reconstruction will not gain momentum,” she said.

Separately, the Congress Party on Monday attacked the Central Government soon after the country’s Gross Domestic Product (GDP) plunged to (-) 23.9 per cent during the first quarter of Financial year 2020-21 saying the “fake narrative” has been exploded.

Addressing a virtual press conference, former Finance Minister P. Chidambaram said, “The CSO has released the provisional estimates of GDP for the quarter April-June 2020. And the GDP in the first quarter has declined by a whopping 23.9 per cent.”

“It means, about one quarter of the gross domestic output as on June 30 has been wiped out in the last 12 months. Another way of looking at it is, since the end of 2019-20, the gross domestic output has fallen by about 20 per cent,” he said.

Taking a swipe at the government, Chidambaram said, “The Finance Minister who blamed an ‘Act of God’ for the economic decline should be grateful to the farmers and the gods who blessed the farmers. As the only sectors that have grown at 3.4 per cent are Agriculture, Forestry and Fishery.”

His remarks came after the CSO said that the country’s GDP plunged to (-) 23.9 per cent during the first quarter (Q1) ended June 2020-21.

Chidambaram further said that every other sector of the economy has declined sharply, some precipitously. Lamenting at the government, he said that the estimates do not come as a “surprise” to us.

“They should be a matter of surprise to the government that was seeing green shoots on several days during the first quarter. They should also be a matter of shame to the government that did nothing -- literally nothing -- to cushion the fall by taking suitable fiscal and welfare measures, but we know that the Modi government has no shame and will not acknowledge its mistakes,” the Congress leader said.

He also pointed out that the economic tragedy was foretold by many close observers of the Indian economy, most recently by the Reserve Bank of India (RBI) in its Annual Report released a few days ago.

Agencies