GDP growth 20.1% in Q1 after Covid slump

NEW DELHI: India’s GDP grew at 20.1% in the quarter ending June — in line with expectations — although the high number is the result, not of a V-shaped recovery in the economy, but a favourable base effect. Compared to the last quarter of 2020-21, the country’s GDP actually contracted by 16.9%, although this can be attributed to the bruising second wave of the pandemic in April and May. And compared to the first quarter of 2019-20, it contracted 9.2%.

The growth was largely the result of a 68-day long nationwide lockdown imposed on March 25, 2020, that led to an unprecedented contraction of 24.4% in GDP. Indeed, economic activity did not regain pre-pandemic levels (in the June 2019 quarter) in the first quarter of the current fiscal year.

RBI’s Monetary Policy Committee (MPC) projected a growth rate of 21.3% and a Bloomberg poll of 45 economists, 21% for the quarter. Gross Value Added (GVA), which captures the actual production (GDP numbers also include taxes) grew at 18.8%, again lower than a Bloomberg forecast of 19.6%.

“The fact is that the latest GDP numbers show a large sequential contraction and, when compared to June 2019 levels, show the enormity of the economic challenge. Even these numbers could see significant downward revisions as there might have been an overestimation of informal sector activity in these estimates,” said Himanshu, associate professor of economics at Jawaharlal Nehru University.

However, chief economic advisor Krishnamurthy V Subramanian chose to focus only on the growth (and not the base effect) and said strong fiscal

measures announced in the past year-and-half, and the pace of India’s vaccination drive have helped faster economic recovery. The growth number “reaffirms the government’s prediction of an imminent V-shaped recovery made last year in August,” he said.

Central government spending numbers from the Controller General of Accounts (CGA), which works under the ministry of finance, show that capital expenditure of the government was ₹1.11 lakh crore in the quarter ending June compared to ₹88,273 crores in the same period last year. The capex momentum seems to have slowed down in the month of July (the latest available numbers), with the government spending ₹16,932 crore in July compared to ₹23,576 crore in July 2020.

The latest GDP numbers support the argument that the pandemic, especially its second wave has damaged household balance sheets and therefore their purchasing power.

Private final consumption expenditure (PFCE) contracted by 17.4%, more than the overall GDP number on a quarter-onquarter basis in the June quarter. Even the year-on-year numbers show that private consumption has a bigger deficit with prepandemic levels. PFCE grew only 19.3% in the quarter against a 26.2% contraction in the quarter ending June 2020.

Other high frequency indicators for the month of July suggest that private consumption might not have revived even after the second wave of Covid-19 infections. The Consumer Confidence Survey of RBI did not show any significant improvement in consumer sentiment between the May and July 2021 rounds. Indirect tax collections for the month of July suggest economic transactions did not pick up. The Centre’s GST collecplanes tions in July 2021 were ₹51,952 crore, lower than the ₹57,725 crores collected in July 2019. Even union excise duty collections, primarily from sale of petroleum products, in July were lower than the July 2020 figures.

The other big drag on the GDP numbers was the net exports category, which contracted by a massive 282% even on a year-onyear basis, thanks a rise in imports (even though exports increased) as economic activity picked up momentum compared the low levels during last year’s lockdown. And the government’s consumption expenditure, measured by Government Final Consumption Expenditure (GFCE) contracted by 4.8% on a year-on-year basis and 7.6% on a quarter-on-quarter basis.

While GFCE measures government’s consumption expenditure, public spending seems to have played a role in giving some boost to investment spending in the June quarter. Gross Fixed Capital Formation (GFCF), which measures investment spending in the economy, grew at 55.3% in the June 2021 quarter, against a 46.6% contraction in the June 2020 quarter.

“The main disappointment comes from the contribution of the government sector, both from the demand and output side,” said DK Srivastava, chief policy advisor at EY India. “On the demand side, GFCE contracted by 4.8%, the only demand segment that contracted. On the output side, public administration, defence, etc showed a growth of 5.8% over the first quarter of 2020-21, but a contraction of 5% over the first quarter of 2019-20.”

Given the contact intensive nature of most service sector activities, they have suffered the biggest damage during the pandemic. This is borne out by sector-wise GVA numbers in the latest GDP statistics. Neither industry, nor service sector GVA managed to cross pre-pandemic (June 2019 quarter) levels in the June quarter . But services (12.5%) have a much larger deficit vis-a-vis the June 2019 numbers than industry (6.2%). Within services, the trade, hotel and restaurants sub-sector, which is among the largest sources of employment outside agriculture, saw the biggest deficit (30.2%) when compared to June 2019 quarter GVA numbers.

Agricultural GVA grew at 4.5% in the June quarter, an improvement over the 3.5% growth in June 2020. A quarteron-quarter comparison of GVA numbers shows that the second wave affected all sectors. The respective contraction in agriculture, industry and services was 10.7%, 17.1% and 11.8%.

What was the impact of second wave of Covid-19 on the economy?

The best way to answer this question is to look at the quarteron-quarter rather than year-onyear trend in the GDP numbers. There was a 16.9% contraction in the June 2021 quarter GDP numbers compared to March 2021 quarter. While this was much lower than the 29.7% quarter on quarter contraction in June 2020, when the lockdown was far more crippling than during the second wave, it was not insignificant by any means. The June 2021 quarter GDP numbers were also lower than the September 2020 quarter numbers, which is when the first wave of Covid-19 peaked in India.