GDP likely to contract by 7.7% in 2020-21, says Govt.

India’s real GDP (Gross Domestic Product)is estimated to contract by 7.7% in 2020-21, compared to a growth rate of 4.2% in 2019-20, with Real GVA (Gross Valued added) shrinking by 7.2%, as per advance estimates released by the National Statistical Office (NSO) on Thursday.

India’s economy had grown at 4.2% in 2019-20, but entered a recessionary phase with two successive quarters of sharp contraction triggered by the COVID-19 national lockdowns beginning March 2020.

Following a 23.9% collapse in the economy between April to June 2020 period, the GDP fell by 7.5% in the second quarter – leading to a real GDP contraction of 15.7% in the first half of 2020-21. The second half of the year will surface to record near-zero growth or a mere 0.1% contraction, the advanced estimates suggest.

Based on an uptick in several indicators in the last few months, several agencies have upgraded their estimates of India’s economy, with the Reserve Bank of India recently projecting a 7.5% contraction in the year compared to its earlier estimate of a 9.5% decline.

Just two sectors are estimated to record positive growth in GVA this year, with Agriculture continuing its strong run through the first half of year to the second half (3.4%) and Electricity, Gas, Water Supply & Other Utility services (2.7%).

Sharpest decline

The sharpest decline in the pandemic-dented year is expected in Trade, Hotels, Transport, Communication and Services related to broadcasting (-21.4%), followed by Construction (-12.6%), Mining and quarrying (-12.4%) and Manufacturing (-9.4%). Public administration, defence and other services are also projected to contract by 3.7%, while Financial, Real Estate and Professional Services shall record a marginal 0.8% decline year-on-year, as per the advanced estimates.

Real GVA at basic prices is estimated at ₹123.39 lakh crore in 2020-21, against ₹133.01 lakh crore in 2019-20, while the real GDP in 2020-21 is likely to attain a level of ₹134.40 lakh crore, as against the provisional GDP estimate for 2019-20 of ₹145.66 lakh crore, the NSO said in a statement.

The Finance Ministry said the advanced estimates “reflect continued resurgence in economic activity” in the third and fourth quarters. “The continuous quarter-on-quarter growth endorses the strength of economic fundamentals of the country to sustain a post lockdown V-shaped recovery. On the demand side, real GDP in 2020-21 has been supported by an estimated increase in Government Consumption Expenditure by 5.8%,” it said, reacting to the NSO report.

State Bank of India group chief economic adviser Soumya Kanti Ghosh said, “It’s now official. Due to the COVID-19 pandemic, India will witness negative GDP growth rate for the first time after 1979-80. This estimate, however, has a shelf life of only two months and is only used as an input for Budget arithmetic. We believe that GDP and GVA for 2020-21 would be revised further downwards in estimates that will be released in February and May.”

D.K. Srivastava, chief policy advisor at EY India, said the much better performance as per the first advanced estimates compared to multilateral agencies like the IMF (which projected 10.3% contraction in 2020-21), is driven largely by a robust recovery in the second half of the year in three sectors — financial, real estate and professional services, construction, and public administration, defence and other services.

Government expenditure is expected to show a robust growth of 17% in the second half of the year, despite the challenges faced by the government on fiscal consolidation and the fact that government expenditure fell 3.9% in the first half of the year, CARE Ratings said in an analysis of the estimates.

While private consumption and investment will end the year in the negative zone, their contraction is also expected to moderate to 0.6% and 0.8%, respectively, in the second half, after a far sharper collapse in the first half.

“In the last few months, there has been a strong economic recovery which will require to be nurtured especially in supporting the critical pillars of consumption to sustain the recovery momentum,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII), indicating need for continued policy support for growth hopes.

COVID-19 caveats

As usual projection techniques wouldn’t have worked in a pandemic-led scenario, the Statistical office has made necessary modifications while extrapolating data for the full-year projection, but added a caveat that as data collection itself was a challenge in the lockdown, underlying macro indicators to track industrial production and inflation may vary significantly.

“Further, the projected indices may significantly vary from the actual indices which in turn will depend on the pandemic-led economic situation prevalent during those months and specific measures, if any taken by the government. Estimates are, therefore, likely to undergo sharp revisions for the aforesaid causes in due course, as per the release calendar. Users should take this into consideration when interpreting the figures,” the NSO warned.

Aditi Nayar, principal economist at ICRA, said, “While the advance estimates are based on data available for only the first six to eight months, the modifications made in the extrapolation process seem to have captured the impending upturn expected in the remainder of this extremely tumultuous year. The contraction of 7.7% forecast by the advance estimate of GDP is similar to our forecast of a 7.8% decline.”