Led by a recovery in construction and manufacturing activities, India’s gross domestic product (GDP) is estimated to have contracted to 9.5 percent in the September quarter from 23.9 percent in Q1 FY2021, rating agency ICRA said on November 19.
“A substantial recovery in manufacturing and construction is likely to underpin the expected improvement in the performance of the industrial GVA (Gross Value Added) in Q2 FY2021. Various sectors of manufacturing recorded an improvement in demand and volumes in Q2 FY2021, though the performance was admittedly uneven,” Aditi Nayar, Principal Economist, ICRA said.
In addition to the continued cost-cutting measures, the availability of raw material inventory that had been procured previously at subdued costs supported the earnings of the manufacturing entities in the September quarter compared to the April-June period.
“We expect the contraction in manufacturing GVA to narrow considerably to around 10percent in Q2 FY2021 from 39.3percent in Q1 FY2021, Nayar said.
The extent of the recovery of the informal sectors remained unclear and "we caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors" she said.
The rating agency said there was a robust recovery in the performance of key construction sectors such as cement and steel and healthy central government awards in roads and railways during Q2 FY2021.
ICRA expects the contraction in construction GVA to narrow to around 12 percent in Q2 FY2021 from the sharp 50.3 percent in Q1 FY2021. It also expects the GVA for electricity, gas, water supply and other utilities to grow by a moderate 2 percent in Q2 FY2021 against a contraction of 7 percent in Q1 FY2021. This may be the only sub-sector apart from agriculture to record a YoY rise in Q2 FY2021.
The lead indicators of the trade and transport sectors such as railway revenue-carrying freight, generation of goods and services tax (GST), e-way bills, service sector exports and diesel consumption displayed a marked improvement in their YoY performance in Q2 FY2021 relative to the previous quarter.
However, the Covid-19 pandemic continued to adversely affect demand in the contact-intensive sectors such as tourism, hospitality and recreation in that quarter, the report said.
“The healthy pace of expansion of the GoI’s spending in Q1 FY2021 had prevented an even sharper fall in the GDP in the lockdown quarter. With the expenditure management measures that have been put in place, the momentum reversed in Q2 FY2021, despite the fiscal stimulus that has been announced so far. We fear that the shrinkage in government spending may have capped the pace of the economic recovery in Q2 FY2021,” the agency said.
The performance of other services such as education and health would have revived in Q2 FY2021 relative to the situation during the lockdown. ICRA expects the contraction of the GVA of public administration, defence and other services to narrow mildly to around 8 percent in Q2 FY2021 from 10.3 percent in Q1 FY2021, Nayar added.Moody’s had revised India’s GDP forecast to a contraction of 8.9 percent against its earlier projection of 9.6 percent for the calendar year 2020.