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Q1 GDP numbers show worst contraction on record; will market take a knock on Tuesday?

The decline is steeper than the estimates but the market is not going to pay too much attention to it as it was expected to be bad, says Pankaj Pandey of ICICI Direct.

September 01, 2020 / 07:16 AM IST

The Indian economy shrank 23.9 percent year-on-year in the first quarter of the financial year 2020-21, much worse than market estimates of about 18 percent drop.

This is the biggest contraction on record as the coronavirus crisis took a toll on the economy.

Industries recorded a fall of 38.1 percent, services 20. 6 percent, manufacturing of 39.3 percent and hotels of 47 percent. Agriculture was the only bright spot, growing 3.4 percent.

"The sharp fall in the first-quarter GDP is on expected lines, given that around 70-80 percent of the economy was on a standstill in the first two months of this quarter. As expected, private final consumption expenditure and investments have contracted sharply in this quarter, while the positive agriculture growth has been the silver lining," said Rajani Sinha, Chief Economist & Head Research at Knight Frank India.

"With the economy unlocking in the last few months, most economic parameters have improved to 70-90 percent level of the corresponding period of the previous year. However, a sustainable recovery would depend on the time taken to contain the spread of the virus. It is very important for consumer sentiments and consumer spending to improve the economy to bounce back. Increased infrastructure investment by the government and demand boosting measures are much required at this point for the economy to recover," Sinha added.

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Read more: GDP Q1FY21 data: All sectors barring agriculture contract

Will GDP prints knock market sentiment?

The fall in GDP is steep and higher than expected. Analysts, however, are of the view that the market may not focus on the GDP but will react to the ongoing Indo-China tension and the new margin pledge rules by Sebi.

"The decline is steeper than the estimates but the market is not going to pay too much attention to it as it was expected to be bad," said Pankaj Pandey, Head of Research at ICICI Direct.

Pandey expects a correction in the market.

"Market may correct slightly because of Indo-China tensions and the Sebi margin rule but some bit of a correction makes the market healthier," he added.

Arjun Yash Mahajan, Head – Institutional Business, Reliance Securities, is of the view that the contraction in GDP numbers is on expected lines.

He, too, views the flare-up of tensions between India and China as a bigger concern for equity markets along with the new margin requirement for the retail investor, which requires the investor to put upfront 20 percent margin in form of cash or stock for both 'buy' or 'sell' order.

"The 1QFY21 GDP print is already priced in the markets. What needs to be looked at is the Q2FY21 GDP numbers. If that is also on the negative side and on similar lines to Q1FY21 GDP print, then we may see a correction," Mahajan said.

"The current rally and euphoria have been on the back of liquidity injected globally and in India. I will continue to be cautious and book-profit and take money home and will look to take invested capital out of the market and ride on the profits."

Jyoti Roy, DVP- Equity Strategist, Angel Broking feels while the contraction in GDP for Q1FY21 was more than consensus estimates, it has already been factored in, to some extent, as we are at the end of Q1FY21 result season.

"While the Q1FY21 corporate results have been more or less in line with market expectations, the weak GDP numbers point to weakness in the MSME and the unorganised sector. However, pent up demand and inventory push prior to the festive season along with gradual opening up of the economy should help growth rates to improve significantly in Q2," Roy said.

"While the GDP numbers in itself would not have had an adverse impact on markets we believe that the proposed SEBI changes to margins and pledging which kicks in from tomorrow will continue to put pressure on markets. Markets will also take cues from the auto sales and PMI numbers for August which start flowing in from tomorrow," Roy added.

What experts say about the GDP print

Here are the views of top analysts on GDP prints and the market:

Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities

Real GDP growth at -23.9 percent in Q1FY21 was much lower than what markets were expecting.

The print indicates that the trough in the economy was much lower and the pickup will likely be more elongated.

The production side was pulled down by a deep contraction in manufacturing, construction, trade, hotel and transport sectors while the expenditure side was clearly pushed lower by heavy contraction, both in consumption and investment.

Given the gradual improvement in activity indicators (remaining well below pre-COVID levels), the growth recovery will be gradual and contracting for all quarters in FY2021.

Further, growth recovery will also hinge on curbing COVID spread and removal of local lockdowns.

The choice for the government will be whether to push consumption or investment.

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 in the first half of FY22.

Joseph Thomas, Head of Research - Emkay Wealth Management

A fall close to -20 percent was more or less expected. Even with some improvement in the economic variables in the coming three quarters, the growth for the whole year would be around -5 percent or slightly higher for the whole year.

The probability of this number being revised is quite high given the fact that there have been practical difficulties around data collection and estimation on manufacturing and industries, and consumer prices.

Except agriculture across sectors including services, manufacturing, trade, etc, have seen an unprecedented fall.

Whether it is private consumption or capital formation, the numbers are hugely negative and would require more action from the government, though the government’s fiscal position does not leave much room for further action.

The core sector numbers, too, indicate nothing different regarding the state of the economy.

A demand or consumption-led recovery is crucial for the economy, and it may require measures by which the disposable income of people is enhanced.

Nish Bhatt, Founder & CEO, Millwood Kane International

The growth rate for April to June quarter was expected to be bad but it turned out worse, a degrowth by 23.9 percent is worse than the most bearish estimate. Agricultural output is the only positive element in the GDP print.

As the April-June quarter saw the maximum period of the national lockdown the degrowth was severe, going forward as the government re-opens the economy in phases, government spending, and festive season spending is expected to help the growth rate to be in the positive territory.

While the RBI has done its part to help boost consumption and economy, a further rate cut may help boost credit offtake.

The government may still have some more firepower with further stimulus measures for specific sectors. Good monsoon, high agri output will help with a pickup in rural consumption.

Government spending, reforms, and more measures to boost consumption are required to bring back growth on track.

Naveen Kulkarni, Chief Investment Officer, Axis Securities

A sharp contraction in Q1FY21 GDP, a drop by 23.9 against an expected fall of 20 percent, has been due to the strictest lockdown compared to other countries.

This is along the expected line as most of the high-frequency indicators (PMI, IIP, core industry) were showing tepid data due to the sharp fall in the economic and commercial activities during the quarter.

The agriculture sector stands out, growing by 3.4 percent. Higher rural spending by the government and better rabi harvest has benefited the sector.

Timely monsoon has also led to optimism about Kharif sowing supported by reverse migration aiding the labour availability.

Now the market will look for the GDP recovery in the remaining months of FY21, however, this is not strong enough to offset the shock from Q1.

The base effect will push up growth in FY22. It remains to be seen how the economic activities pan out after unlock 4.0  and the direction of the high-frequency indicators.

Deepthi Mary Mathew, Economist, Geojit Financial Services

Indian GDP growth rate contracting by 23 percent was more or less expected.

The economy was in a complete lockdown for nearly two months, and all the high-frequency indicators were pointing towards the fact that the country was heading towards one of the worst contractions.

Consumption, the major driver of Indian GDP contracted by 27 percent in the first quarter. Investment demand as measured by Gross Fixed Capital Formation (GFCF) contracted by nearly 47 percent.

Investment growth has been in the negative territory for the last three quarters, and the pandemic induced crisis has only worsened the situation.

Considering the uncertain economic scenario, investment growth would continue to be in the negative territory in the coming quarters.

Deepak Jasani, Head of Retail Research, HDFC Securities

The GDP numbers could upset the government’s fiscal math that may force major changes in the public finance estimates.

Now the focus will shift to the September quarter. Going by the July core Infra number of -9.6 percent, the September quarter may also record a high single-digit decline in GDP on a YoY basis.

While the rural economy has offset the slowdown in urban areas in Q1 to some extent, rural recovery is unlikely to support such pace in subsequent quarters. One reason for this is that COVID-19 has started to penetrate rural areas at a fast pace since July.

India’s recovery path appears a long and hard one. A mix of monetary and fiscal measures to prop up the economy has fallen short so far.

Some innovative thinking on the part of government and RBI and some good providence is required to turn the tide quickly.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Aug 31, 2020 07:36 pm
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