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Signs of revival clear, but government and analysts advise caution

With the number of confirmed COVID-19 cases rising once again, the government’s representative - Chief Economic Advisor Krishnamurthy Subramanian - advised cautious optimism

November 27, 2020 / 09:25 PM IST
Representative Image

Representative Image

The pent-up demand following a nationwide lockdown ensured that India’s gross domestic product (GDP) contraction in July-September was less worse than what the economists were expecting.

However, with the number of confirmed COVID-19 cases rising once again, the government’s representative - Chief Economic Advisor Krishnamurthy Subramanian - advised cautious optimism.

Real GDP for the July-September quarter contracted by 7.5 per cent year-on-year, data released by the National Statistical Office showed on November 27. Analysts polled by news agencies Reuters and Bloomberg had forecast a contraction of 8.8 per cent and 8.2 per cent, respectively, for the second quarter.


The data also showed that the country has begun its gradual recovery following the nationwide lockdown in April, May, and June which had flatlined the economy. The real GDP during April-June had contracted 23.9 per cent, the steepest fall ever (and the first contraction in 40 years). The July-September quarter last year had witnessed a GDP growth of 4.4 per cent.


This means that sequentially, India’s GDP grew by 22 per cent in the quarter.

“We should be cautiously optimistic. Caution is warranted because the economic impact is primarily due to the COVID-19 pandemic,” Subramanian said at a media briefing following the release of GDP data.

He said because of the uncertainty due to a second wave of cases across the country, it will be difficult to predict if economic growth reaches positive territory in October-December and January-March quarters.

Subramanian, however, added that given the lower pace of contraction in Q2, many estimates for full-year 2020-21 GDP contraction by agencies, including that of -9.5 per cent by the Reserve Bank of India, could see an upward revision.

"I would say that given what we have seen in Q1 and Q2 and with the optimism that is being seen in the estimates, I do see upside potential in that estimates," he said.

Data released on November 27 showed that once again, the agriculture sector was the main driver of the economy in the second quarter. Agriculture grew 3.4 per cent year-on-year, the same as in the first quarter of the current fiscal year.


A strong revival was seen in the manufacturing sector, which rose 0.6 per cent in July-September following a contraction of 39.3 per cent in April-June. However, analysts warned this could be because of low base effect from July-September 2019.

Electricity, water, gas, and other utility services also rose 4.4 per cent after contracting by 7 per cent in April-June.

As a percentage of GDP, government final consumption expenditure contributed 10.9 per cent, lower than 18.1 per cent in April-June and 13 per cent in July-September last year, while private final consumption expenditure was 54.2 per cent of GDP, compared with 56.5 per cent in the same period last year.

Gross fixed capital formation was 29 per cent, almost the same as July-September last year.

“The extent of the recovery in the performance of the informal sectors in Q2 FY21 remains 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,” said Aditi Nayar, Principal Economist with Icra Ltd. She added that the sharp easing in the pace of contraction in private final consumption expenditure in Q2 FY2021 benefitted from the pent-up demand related to the lockdown quarter.

“We foresee a stronger rebound in Indian economic activity in H2 FY2021, relative to our earlier assessment, with regional and sectoral unevenness in the pace of the recovery. At present, it appears that the GDP contraction in FY2021 is likely to range between 7-9 per cent, milder than our previous forecasts, unless rising COVID-19 infections force fresh restrictions,” Nayar said.

Sunil Sinha of India Ratings said if the current trends sustain then a faster recovery is possible. “But with rising COVID-19 cases and some states hinting that they may have to impose some kind of lockdown could be a spoiler in the growth recovery process. Therefore, these are still early days, and we believe the data for few more months will have to be watched before we can be sure that we are on a sustained recovery path,” he said.
Arup Roychoudhury
first published: Nov 27, 2020 09:23 pm
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