Economists’ Take: India Q1 GDP Drop Prompts Revisions In Full Year Estimates

The Indian economy contracted by nearly a quarter in the April-June period, prompting economists to review their estimates for the fall in GDP expected for 2020-21.

India was under a strict lockdown in the first quarter of the current financial year and started to open up in the second quarter. However, a continued spread of the virus has meant that economic activity has recovered at a modest pace. That, combined with a steeper-than-expected fall in first quarter GDP, could mean that the Indian economy will contract more than earlier expected for the full financial year.

The Reserve Bank of India has not provided its own estimates of GDP growth for the year. A professional forecasters’ survey conducted by the central bank in August forecast a 5.8% fall in GDP in the current financial year.

The actual fall may be worse, economists now fear.

Sonal Varma, Chief India Economist, Nomura

• We lower our GDP growth projection to -9.0% in 2020 (vs -5% previously) and -10.8% in FY21 (vs -6.1% previously).
• Drag from private consumption and investment was too large to be countered by counter-cyclical government spending and higher net exports.
• Looking ahead, high frequency indicators have improved so far in Q3, but the sequential pace of activity normalisation is moderating, as India continues to struggle in flattening its pandemic curve.
• In our view, the current weak economic conditions requires a more aggressive fiscal response, but budgeted fiscal support has been limited, while monetary policy is hamstrung due to inflation.

Neelkanth Mishra, Strategist, Credit Suisse

• The 24% fall was worse than several forecasts, but we suspect many moderated the forecast decline assuming the government’s data/models would not catch all the weakness.
• Private consumption fell 27% and investment fell 47%, offset by a better trade balance and government spending.
• Nominal GDP fell 22.6%. It appears unlikely that FY nominal GDP growth will be meaningfully different from the real GDP decline this year—at most 3 percentage points higher.
• To get to the consensus of 5.5% GDP contraction for FY21, the next three quarters must see at least +1.1% growth, which appears unlikely now, implying estimate downgrades. Full year contraction now seen at 8%.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

• Real GDP growth at a contraction of 23.9% in the April- June 2021 quarter was much lower than what markets were expecting.
• Contraction for the full financial year may be as steep at -11.5%.
• Given the limited fiscal space and the need to stimulate a more durable growth, the recovery will be gradual and is likely to continue into the first half of FY22.
• Growth recovery will also be hinged to the curb of the Covid-19 spread and removal of even localised lockdowns. The choice for the government will be on whether the consumption or the investment side needs to be pushed.

Kaushik Das, Chief India Economist, Deutsche Bank

• Post the Q1 GDP data, we are revising down our FY21 real GDP forecast to -8.0% from -6.2% earlier.
• While the worst is behind us as far as contraction in GDP is concerned, the subsequent quarters are likely to see only a modest pace of recovery, in our view, as the Covid-19 problem continues to linger.
• Economy expected to contract 9% in the July-September quarter, 1.5% in October-December quarter and return to 2.5% growth in January-March’21.

Pranjul Bhandari, Chief India Economist, HSBC

• Q1 GDP print gives us confidence on our below-consensus growth forecast of 7.2% contraction in FY21.
• We expect growth to remain negative until December 2020, before turning slightly positive in early 2021, led largely by a weak statistical base.
• Despite our forecast for a positive 7.2% GDP growth next year, GDP is only likely to return to pre-pandemic levels in early 2022.
• Furthermore, we expect the pandemic to leave behind an economic scar. We expect potential growth to fall from 6% before the pandemic, to 5% post-pandemic, led by a weak banking sector.

Madan Sabnavis, Chief Economist, CARE Ratings

• GDP is estimated to contract by 6.4-6.5% in 2020-21.
• Consumption demand and investments unlikely to see a noteworthy improvement during the course of the year. As such, government spending would have to do the heavy lifting.
• Although the higher growth in the agriculture sector and consequently rural demand would support the domestic economy, it would, however, not be sufficient to compensate for the decline in urban demand and growth.

Rahul Bajoria, Chief India Economist, Barclays

• GDP, excluding public administration and agriculture, dropped by close to 35%. This reflects the hit to the private sector.
• The fact that private consumption has dropped by over 25% indicates that the pull back in consumption and investments has been much sharper. Private consumption is expected to pick up quicker than private investments.
• Negative growth is likely to remain with us for atleast the next one or two quarters.
• GDP expected to contract 8% in the July-September quarter and 6% in FY21.