Early warning: Growth slows to 3.1 per cent in Q4 which had just one week of lockdown

The March quarter estimates dragged the overall GDP growth rate for 2019-20 to an 11-year low of 4.2 per cent, the provisional estimate released by National Statistical Office (NSO) on Friday showed.

INDIA’S QUARTERLY growth rate plummeted to its lowest in the current series at 3.1 per cent in the January-March period of 2019-20, led by a sharp contraction in the manufacturing and construction sectors, even as fresh data provided clear indications of a further slide in estimates during the April-June quarter.

The March quarter estimates dragged the overall GDP growth rate for 2019-20 to an 11-year low of 4.2 per cent, the provisional estimate released by National Statistical Office (NSO) on Friday showed. The growth numbers, accounting for only one week of lockdown to slow the spread of Covid-19 pandemic in March, are expected to worsen going ahead with the suspension of economic activity.

India has seen one of the harshest lockdowns in the world, with gradual relaxations for resumption of economic activities being allowed after the third phase ended on May 17. Growing Covid cases in states including Maharashtra, Gujarat, Tamil Nadu and Delhi have continued to pose challenges for full opening up.

Agriculture and government spending were among the few sectors that survived the decimation, registering growth rates of 5.9 per cent and 10.1 per cent, respectively, during the March quarter.

That the June quarter would be far worse is indicated by fresh data released by the industry department Friday, which showed the eight infrastructure sectors contracted by a record 38.1 per cent in April, as against a growth of 5.2 per cent in the same month last year.

High-frequency growth indicators have shown broad-based declines across both the demand and supply sides, with the slump in discretionary consumption and services exceeding the contraction in investment and industrial activity.

The manufacturing Purchasing Managers’ Index in April had slid to a record low of 27.4 from 51.8 in March, while merchandise exports contracted by 60 per cent during the first month of this financial year.

Also, with the previous financial year’s growth figure lower than earlier estimate of 5 per cent, the NSO sharply revised down the quarterly GDP growth numbers for earlier quarters: for April-June to 5.2 per cent from 5.6 per cent estimated earlier, for July-September to 4.4 per cent from 5.1 per cent earlier, and for October-December to 4.1 per cent from 4.7 per cent estimated earlier.

Barring agriculture which recorded a growth of 4 per cent in FY20 as against 2.4 per cent in the previous year, mining and quarrying, which grew at 3.1 per cent from a contraction of 5.8 per cent, and public administration that recorded a 10 per cent growth, all other sectors slowed down in FY20. Manufacturing slumped, remaining almost flat with 0.03 per cent growth in FY20 compared with 5.7 per cent in the previous year.

Investment remained muted with Gross Fixed Capital Formation (GFCF), a proxy for private investment, contracting 2.8 per cent as against a 9.8 per cent growth in 2018-19. Private final consumption expenditure, which reflects consumption demand in the economy, slowed to 5.3 per cent in FY20 from 7.2 per cent in the previous financial year. Government expenditure continued to provide support to the GDP, growing 11.8 per cent in 2019-20, up from 10.1 per cent in the previous financial year.

Growth rate in terms of Gross Value Added (GVA), which is GDP minus net product taxes and reflects supply-side growth, slowed to 3.9 per cent in 2019-20 from 6 per cent growth in the previous year. The nominal GDP growth rate, which accounts for inflation, is estimated to have grown at 7.2 per cent in 2019-20, sharply lower than 11 per cent in the previous year.

Economists highlighted that GDP is headed for a contraction going ahead due to the impact of Covid-19. “Going forward… government expenditure will again be the growth engine in FY21. Weak commodity prices and import demand will also provide some support to growth. Despite this, the economy will contract in FY21 after FY20,” Devendra Kumar Pant, Chief Economist, India Ratings and Research, said.

Congress leader and former Finance Minister P Chidambaram said the GDP data for January-March has come lower than their forecast of 4 per cent. “We had forecast that GDP for Q4 will touch a new low at below 4 per cent. It has turned out to be worse at 3.1 per cent. Remember, this is pre-lockdown. Of the 91 days of Q4, lockdown applied to only to 7 days. It is a telling commentary on the economic management of the BJP government,” he said.

In his statement on May 22, Reserve Bank of India Governor Shaktikanta Das had said the risks to growth outlook are the gravest, noting that GDP growth in 2020-21 is estimated to remain in negative territory.

“The combined impact of demand compression and supply disruption will depress economic activity in the first half of the year. Assuming that economic activity gets restored in a phased manner, especially in the second half of this year, and taking into consideration favourable base effects, it is expected that the combination of fiscal, monetary and administrative measures being currently undertaken would create conditions for a gradual revival in activity in the second half of 2020-21. Nonetheless, downside risks to this assessment are significant and contingent upon the containment of the pandemic and quick phasing out of social distancing/ lockdowns. Given all these uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from H2: 2020-21 onwards,” Das had said.

The fourth quarter (Q4-FY20) growth rate, analysts said, would be relevant when estimating the April-June quarter (Q1-FY21) growth rate this fiscal, given that economic activity had come to a virtual standstill in April and showed continued sluggishness in May, with the services sector being affected the most.

“The further extension of the lockdown till the end of May amid graded relaxations, and the expectation of substantial delays in getting the full supply chain operational, especially given the likelihood of enduring labour mismatches following the return of migrant workers to their home states, would further dampen economic activity. We expect Indian GDP (at constant 2011-12 prices) to contract by 25 per cent and 2.1 per cent, respectively, in Q1 FY21 and Q2 FY21, which implies that a recession is underway… at present, we have assumed that the lockdown will be lifted within Q1 FY21, based on which the trajectory of GDP indicates a V-shaped recovery. However, if there is a second wave of infections that forces subsequent lockdowns either in India or globally, the ensuing demand uncertainty and supply chain hiccups could result in a W- shaped economic cycle, the inflection points of which can’t be gauged at this stage,” said Aditi Nayar, Principal economist, ICRA Ltd.