How deep could be the Q1 contraction?

Having said that output may contract this year, it was widely expected the Reserve Bank of India (RBI) would present the growth (and inflation) projections at its August 6 meeting. However, this did not happen. For the lockdown quarter of April-June, private forecasters predict an intense GDP contraction that some project as much as -25 percent.

Monthly indicators such as industrial production and purchasing managers’ indices (PMIs) do show sharp contractions, particularly severe in services; the weekly mobility indicators too suggest activities remain almost one-third lower than in February. A coherent picture is still hard to obtain.

The April-June quarter is an unruly mix of full, partial and scattered lockdowns that weren’t exactly linear with spread or growth of infections. Confusion is compounded because no official estimate exists — the first-quarter GDP growth outturn will be published only at the end of this month. With arrivals of some corporate results for the quarter, trends in indirect taxes or GST revenues offer some clue. What do these portend for April-June GDP growth?

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Trends in corporate performance for April-June, as per early results from a sample of 748 firms were recently reported by Business Standard. Aggregate pre-tax profits declined 46 percent year-on-year for this group, while net sales contracted by a quarter percent. Excluding financial (banks and nonbanks), insurance, oil & gas firms, the contraction in profits is almost double, or 91.4 percent, for a set of 632 companies. Profit growth of IT companies is positive at 3 percent; these constitute nearly 45 percent of corporate earnings along with financial firms. The sample size of these listed companies is roughly one-third the size of firms that finalise balance sheets filing at stock exchanges within a quarter in normal circumstances. So the trends are not fully representative but only indicative.

The mirror image of this performance is obtained from the trend in GST revenues that are a fair representation of goods and services produced. However, the context is quite complicated this time. The first three weeks of March were normal, so it’s reasonable to expect indirect taxes too grew at the usual pace, or at least as much as nominal aggregate output grew that quarter. The last week following March 24 is of a full shutdown. So it’s not known with certainty what happened thereafter. April GST collections, which refer to revenues paid for March, are extraordinarily low. This is probably because the regulatory, mandated dates of return-filing and tax payments were relaxed due to pandemic disruptions; the government extended the March deadline to end-June this time as concession.

Keeping these in mind, a conservative attempt can be made to assess the pace of growth of GST revenues for June quarter.

Assume that the March GST revenues kept pace with the nominal GDP growth Jan-March 2020, 7.5 percent, which is reasonable. For the full month, this works out to a sum of Rs 1.22 trillion as GST revenues; adjusting for a week’s lockdown lowers this to an estimated Rs 947.65 billion.

Next, the April GST collection, which is for March and is Rs 323 billion, is adjusted upwards to the estimated Rs 947.65 billion. For this, the difference amount of Rs 624.71 billion is redistributed or apportioned from GST revenues collected in subsequent months, i.e. May, June and July, in which a total Rs 2.4 trillion were collected. The rearrangement is necessary and entirely appropriate because the GST revenues in the period also reflect tax dues of past months for which regulatory deadlines were extended up to June. Subtracting Rs 624.71 billion from the aggregate sum of May-July (Rs 2.4 trillion) reduces it to Rs 1.78 trillion. Last, Rs 150 billion is added to account for delayed/pending tax dues of those small taxpayers who missed filing GST returns for May-July and got further concessions up to September by the government.

This augmentation is a rough approximation of Rs 50 billion each month in the period for these missed revenues. Based on these conservative assumptions, the final estimated GST revenue for the first quarter works out to Rs 1.93 trillion. This compares with Rs 3.02 trillion collected one year ago (May-July 2019). It represents a -36.2 percent year-on-year decline in GST revenues in April-June 2020.

A -36.2 percent contraction in the GST revenues is juxtaposed with a 46 percent decline in corporate profits, albeit of one-third the usual sample. Industrial production data for June published on August 11 showed a 36.1 percent contraction in the quarter. From these measures, it appears the extent of GDP decline in the lockdown quarter could be very severe, or more than anticipated.

However, the caution is that except profits, which represent value addition that figures in the GDP estimation, the other are volume indicators where the value-added is not known. Then again, growth of public spending and agriculture (rabi season of 2019-20, ending June) are both positive offsets.

We should know precisely how much the shrinkage in aggregate output is on August 31, when the GDP data arrives.

Renu Kohli is a New Delhi-based macroeconomist. Views are personal.