Historic recession: On India’s GDP slump

Context

• The fact that India’s economy entered a technical recession in the July-September period has now been confirmed by National Statistical Office data.

Estimates

• Provisional estimates of gross domestic product for the second quarter of the year ending in March 2021 show economic output shrank by 7.5%, following the 23.9% contraction in the first quarter.
• Not only has the economy shrunk for a second successive quarter, marking a recession for the first time in independent India’s history, but the overall GDP figure of ?33,14,167 crore (at 2011-12 prices) reveals output has slid back to the lowest level in 12 quarters.
• This one fact alone ought to give cause for serious concern, notwithstanding the apparent improvement in economic momentum that helped narrow the contraction from the preceding period’s precipitous fall.
• Even there, a closer look at both the expenditure side and the gross value added across various industry categories leaves little room for comfort.

Fall of Aggregate Demand

• Private consumption expenditure — the single biggest component propelling GDP with a share exceeding 50% at constant prices and edging toward 60% in current prices — continued to shrink albeit at a slower pace (-11.3%), reflecting both consumer wariness to spend amid the pandemic and the impact of lost jobs and reduced incomes.
• And, government consumption spending that was hitherto a bulwark and what kept the bottom from falling out in the first quarter when it grew 16%, contracted by 22% revealing the precarious state of public finances.
• Taken together, demand was largely missing.
• And even though the contractions in gross fixed capital formation, exports and imports all narrowed, it was a puzzling almost fourfold growth in ‘discrepancies’ at ?56,962 crore that limited the extent of decline in the overall GDP.

Agricultural growth

• In the real economy, electricity and other utility services joined agriculture in posting growth, expanding 4.4%, as the post-lockdown resumption of industrial activity lifted power and water consumption.

Industrial growth

• Surprisingly, manufacturing GVA inexplicably jettisoned its correlation with official IIP data on the sector: while the latter had signalled an average contraction of 6.7% in the July-September period, GVA data from the NSO on Friday showed manufacturing rebounding to a marginal 0.6% expansion after a 39% collapse in the preceding quarter.
• One possible explanation for this uptick in provisional manufacturing GVA is that the year-earlier period had witnessed a contraction and the statistical effect of a low base coupled with inventory restocking likely lifted the figure.

Real estate and professional services

• Financial, real estate and professional services, which contribute about a fourth of the GVA, widened contraction from the first quarter, shrinking 8.3%.
• Clearly, the financial services sector is not in good health and is an ominous portent for the economy given its crucial role in credit intermediation.

Way forward

• The economy urgently needs a robust demand stimulus if a protracted slump is to be prevented.