India plunges into technical recession as GDP contracts 7.5 per cent in July-Sept quarter

Union Finance Ministry feels the latest data, especially the high frequency indicators, suggest a recovery is under way

India plunges into technical recession as GDP contracts 7.5 per cent in July-Sept quarter

Photo for representational purpose only. iStock

Tribune News Service

New Delhi, November 27

The economy contracted by 7.5 per cent in the second quarter (July-September) of 2020-21 as against a fall of 23.9 per cent during the stringent lockdown months of the first quarter (April to June), according to government data released on Friday.

With the contraction in two successive quarters, India has entered into a technical recession but the Union Finance Ministry feels the latest data, especially the high frequency indicators, suggest a recovery is under way.

The government, however, was not willing to commit that the fourth quarter could see positive growth after it was clear that the third quarter GDP growth will also be negative. “Recovery provides optimism but we urge caution on the pandemic. Winter months must warrant caution and safety protocols must be followed stringently as service to the nation,’’ said the Ministry’s Chief Economic Advisor Kris Subramanian.

In a break from the past, the government used six new indicators in a total of 23 to project -7.5 per cent GDP growth. These include data of rice and fish, purchase of private vehicles, passenger traffic at airports and Centre’s revenue spending.

There was V-shaped recovery in use-based industries in consumer goods, especially consumer durables, and investment, capital and infrastructure goods which suggest strong revival of both consumption and investment that together account for about 90 per cent of India’s GDP, said the Finance Ministry.

The corporate sector seemed back on track in the second quarter after two quarters of contraction, with its level of operating profits similar to that in September 2018, said Subramanian. However, bank credit rose by a little over 5.2 per cent and gross fixed capital formation remained in the negative territory.

The government also released the index of industrial production (IIP) which showed that core sector growth has remained in the negative zone at minus -13.0 per cent. In October the decline was minus 2.5 per cent after raising hopes in September about returning to positive territory with a contraction of 0.1 per cent.

On the positive side, steel production and consumption gathered momentum, signalling revival of construction activity. Power consumption and e-way bills also registered double-digit growth in October, suggesting buoyancy in industrial and commercial activities

Analysts, however, pointed out that consumption remains low, industrial recovery is still weak and the traction seen in IIP growth lately is triggered largely by the festival demand which was also pointed out on Wednesday by the Reserve Bank chief Shaktikanta Das.

Recovery ignites optimism, but a cautious optimism. Sustainability of the recovery critically depends on keeping the pandemic in control. — Union Finance Ministry

We are certain this trend will continue. Private consumption is weak and increased Government spending would help the momentum for a more robust growth in the coming months. — Chandrajit Banerjee, DG, CII.

The growth in manufacturing, though very nominal, is something to cheer for. The real test would be in Q4 when the festive season gets to closure and sustaining the demand would be a challenger. — Divakar Vijayasarathy, DVS Advisors LLP

We believe personal safety and convenience is driving the demand in auto and durables in Q2. It is clear that the size of unaffected parts of the economy is far greater than stressed sectors. Momentum can be sustained by government spending, the vaccine, and monetary policy tailwinds. — Prithviraj Srinivas, Chief Economist, Axis Capital

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