India: GDP records largest drop on record in Q2
Economic output plummeted 23.9% year-on-year in the second quarter of CY 2020 (FY Q1 2020), contrasting the 3.1% expansion seen in the first quarter (FY Q4 2019) and marking the worst reading since current records began in 1996. Moreover, the contraction in activity was likely underestimated somewhat, due to India’s relatively large informal economy, for which it takes longer to collect data.
The steep drop-off in activity reflected the pandemic-related lockdown measures in place for the majority of Q2. Despite the slow and gradual easing of measures in April–May the economy took a massive hit, with sharp contractions in private consumption and fixed investment dragging on the headline figure. Private consumption tumbled 26.7% year-on-year in Q2 after growing 2.7% in Q1. Fixed investment sank at a more pronounced pace of 47.1% in Q2, from the 6.5% contraction logged in Q1. Public spending growth, meanwhile, accelerated to 16.4% in Q2 (Q1: +13.6% yoy).
On the external front, exports of goods and services slid at a quicker pace of 19.8% in Q2 (Q1: -8.5% yoy). In addition, imports of goods and services contracted at a sharper rate of 40.4% in Q2 (Q1: -7.0% yoy), seemingly reflecting a drop in domestic demand Consequently, the steeper fall in imports meant the external sector contributed 5.5 percentage points to GDP in Q2, after having detracted 0.2 percentage points from the reading in Q1.
According to the IMF, putting Q2 GDP figures on a comparable scale for G20 nations, India’s economy was hit the hardest by the pandemic on a quarter-on-quarter seasonally-adjusted basis. High-frequency data suggests the economy likely bottomed out in Q2 and is gaining some momentum, but remains well below its pre-pandemic levels. In the week ending 6 September, data stemming from electricity use, port volume, traffic congestion and air pollution all pointed to improved economic activity compared to the week prior.
Commenting on India’s GDP outlook, Prakash Sakpal a senior economist at ING, noted:
“GDP growth might have passed its bottom but the thriving pandemic provides little hope of a near-term recovery. The policy stimulus has also hit a snag given stretched public finances and rising inflation. This means pretty much nothing can save the economy from continued deep GDP declines over the rest of the year. We recently cut our full-year FY2020-21 GDP growth forecast from -5.2% to -8.6%. The below-expected 1Q FY2020-21 growth nudges it further down to -10.3%. We would imagine it being much worse than that without any more policy support.”