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India’s 0.4% GDP growth good news, but January-March quarter likely to see contraction

India's economy could contract by around 1% in the Q4 if one takes into account the revised full year GDP numbers for the current fiscal. For the full year, NSO forecasts steeper contraction of 8%.

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New Delhi: A sharp rebound in construction and manufacturing helped the Indian economy move back into positive territory after two successive quarters of contraction.

The Indian economy recorded a marginal 0.4 per cent growth in the October-December quarter, that also coincided with India’s festival season, according to data released by the National Statistics Office (NSO) Friday.

However, the economy could slip back into a contraction in the fourth quarter as a loss of momentum of the economic recovery as well as subsidy payouts in the current quarter could compress the GDP numbers.

Graphic by Ramandeep Kaur/ThePrint

The Indian economy had contracted by 24.4 per cent in the April-June quarter and by 7.3 per cent in the July-September quarter, according to the revised numbers.

It could contract by around 1 per cent in the fourth quarter, if one takes into account the revised full year GDP numbers for the current fiscal.

For the full year, the NSO has forecast a steeper contraction of 8 per cent than the 7.7 per cent forecast earlier.

For the quarter ending December, construction recorded a growth of 6.2 per cent as against a contraction of 7.2 per cent seen in the preceding quarter. The financial, real estate and professional services was another sector that saw a sharp revival — growing at 6.6 per cent in the quarter as against a contraction of 9.5 per cent in the previous quarter.

Graphic by Ramandeep Kaur/ThePrint

Manufacturing also turned into positive territory recording a growth of 1.6 per cent as against a contraction of 1.5 per cent. Electricity, water and gas and agriculture, fishing and quarrying were the other sectors that reported positive growth at 7.3 and 3.9 per cent respectively.

Trade, hotels, transport, communication and services, one of the worst-hit segments, also saw marginal recovery, but continued to record negative growth.

Capital formation picks up

Data shows that gross fixed capital formation picked up in the quarter growing at 2.6 per cent, as against a contraction of 6.7 per cent in the year ago period. This followed the massive capital expenditure push by the government beginning October as it looked to revive the economy. However, private final consumption expenditure and government final consumption expenditure continued to record negative growth.

Private final consumption expenditure, buoyed by festival demand purchases, has rebounded from the sharp contraction, but consumption demand continues to remain muted amidst the fallout of the pandemic.

“Investment activity reverted to positive growth of 2.6% y/y, supported by high levels of public investment spending,” said Rahul Bajoria, chief India economist at Barclays India in a note, adding that private consumption should lead the recovery process going forward, aided by high levels of public capex spending.

The finance ministry in a statement said that the Q3 GDP numbers have returned the economy to the “pre-pandemic times of positive growth rates” and are an indication of the further strengthening of V-shaped recovery that began in Q2 of 2020-21.

However, it warned that India is not yet out of the danger of the pandemic.

Also read: Why Modi govt must stop depending on petrol, diesel taxes to bridge its fiscal deficit

Why growth could slip to negative territory again

NSO data implies that the economy could again slip into a marginal contraction in the fourth quarter of 2020-21.

“Various lead indicators have recorded a loss of momentum so far in Q4 FY2021, in contrast to the improvement in sentiment brought on by the vaccine rollout,” said Aditi Nayar, principal economist at ICRA Ltd.

“We expect consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self employed,” she said in a note after the release of the GDP numbers.

She added that the NSO is implicitly projecting that the GDP may slip back into a contraction in Q4. This may be an “unintended consequence of the back-ended release in the Government of India’s subsidies.” Subsidy payouts are deducted from the GDP calculations.

Also read: The 5 factors that will determine the shape of the Indian economy in 2021


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