Q2 GDP contracts 7.5%; but still looks a lot better

Q2 GDP contracted -7.5% but it is more important to understand what that means in the current context.

Nov 28, 2020 12:11 IST India Infoline News Service

The September 2020 quarter GDP numbers are significant in multiple ways. The rural buoyancy continues to manifest as strong agricultural growth in Q2. Additionally, sectors like utilities and manufacturing have shown a phenomenal revival as we shall see later in our GVA analysis. Let us first look at headline GDP.

Q2 GDP contracted -7.5% but it is more important to understand what that means in the current context. On a yoy basis, the GDP contraction of -7.5% contrasts with the +5.5% growth in the Sep-19 quarter. But such comparisons are odious because the world has just come from the brink of a global health disaster. For example, the consensus expectation for Q2 was GDP contraction in the range of 8.5% to 10%. Therefore, -7.5% contraction is not bad; in fact you can say it is commendable. Don’t forget, this comes on the back of a -23.9% contraction in Q1.

Technically a recession, but media is hyping it up

In the Jun-20 quarter, the GDP saw -23.9% contraction which has been followed up with -7.5% contraction. Economists define a recession as two successive quarters of GDP contraction, so by that definition it is a recession. The question is; does the definition really matter? The answer is an emphatic No! You worry about recessions when the problem is unique to a single country or region or it is structural. Most pessimistic estimates also project a sharp and intense bounce FY22. So, let hope trump hype for now!

Data Source: NSO (MOSPI)

As the above chart shows, the recovery in the Sep-20 quarter has been appreciable. If you break up the data, you will find that agriculture continues to be positive and manufacturing has turned around into positive territory. The pressure is more from the services sector and that is more because certain services like trade, tourism and hospitality are structurally impacted by the pandemic lag effect. Don’t stress too much about the recession definition that is being touted in most of the financial media. It means nothing!

Let us not lose sight of the absolute challenge

The real challenge is not so much about recession or otherwise. The real challenge is about the absolute contraction in real GDP. In the Jun-20 quarter, the absolute GDP had contracted by Rs8.45 trillion on a yoy basis. That is a lot of downstream loss in terms of ancillary services, dependent industries, jobs, purchasing power and consumer demand. That is a challenge even in the Sep-20 quarter, albeit to a lesser extent.

According to data put out by National Statistical Office (MOSPI), real GDP for the Sep-20 quarter stood at Rs33.14 trillion. This is sharply lower than the Rs35.84 trillion GDP reported in Q2 last year. However, on a sequential basis, the GDP in absolute terms looks a lot better than the Jun-20 quarter GDP of Rs26.90 trillion. The absolute loss in GDP on a yoy basis is just Rs2.70 trillion in Q2 as compared to Rs8.45 trillion in Q1.

In absolute terms, there is still pain in terms of jobs and consumer demand. However, the recovery over Jun-20 quarter is also much quicker than expected.

Not just farmers, even factories saved the quarter
Data Source: NSO (MOSPI)

We had written last quarter that farmers saved the day. This time it was again the farmers but support came in a big way from manufacturing and utilities too. Here, we have used GVA; i.e. GDP excluding impact of tax and subsidies.
  • A combination of a good Rabi last year and a robust Kharif in 2020 resulted in record food grain output. Agriculture sustained 3.4% growth in Q2; largely de-risked from the pandemic, with the slew of stimulus measures helping rural India.
  • There were 2 segments that showed a sharp turnaround in Q2. Utilities turned around from -7% to +4.4%, the best performer in Q2. The bigger story was manufacturing which bounced from -39.3% to +0.6%. Factory schedules are back to normal and demand has not disappointed.
  • The hefty component of services continues to drag as the downstream impact of manufacturing is yet to reflect in services. Financial services and public services have actually done worse than the Jun-20 quarter. Trade and tourism improved from -47% to -15%, but there are structural issues. The encouraging news is on the construction front that has bounced from -50.3% to -8.6%; giving room for optimism.
Challenges for monetary and fiscal policy

From here, the real challenges are three-fold; notwithstanding the recovery.
  • For the recovery to translate into positive GDP growth, the services sector will have to pick up really fast and participate in future growth.
  • Monetary policy levers are constrained with repo rates at historic lows, abundant liquidity and inflation sticky above 7%.
  • With fiscal deficit almost at 10.5% of GDP, future fiscal levers are also limited. Growth from here will have to come organically through demand revival only.
Q3 could be a lot more indicative of how effectively India is able to exit the contraction.

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