India's GDP contracts by 23.9% in Q1 of FY2021

India’s economy witnessed its steepest quarterly plunge on record, contracting by 23.9% in April-June as the Covid-19 lockdown hit almost all sectors from manufacturing to construction and services. The only silver lining was the farm sector which posted a growth of 3.4%.

India began publishing quarterly Gross Domestic Product (GDP) data in 1996. This is the worst fall since then. The economy had grown by 3.1% in the January-March quarter, 2020.

Experts said the contraction in GDP at 23.9% appeared to be underestimated. As data collection efforts were hit by the pandemic, the statistics office uses substitutes and proxies to estimate the losses of the informal sector.

“The incoming data on the MSME and less-formal sectors could manifest in a deeper contraction when revised data is released subsequently,” said Aditi Nayar, Principal Economist at ICRA.

The extent of contraction in manufacturing (39.3%), construction (50.3%) and services such as trade and hotels (47%) indicated that the recovery may take longer. Other than private estimates, the government and the RBI too are expecting the full-year contraction in the economy in more than 40 years.

Manufacturing already entered the recession with the second consecutive quarter of fall in its output. It had declined by 1.4% in the January-March period.

A recession is two consecutive quarters of negative growth.

“Real GDP print indicates that the trough in the economy was much lower than expected and the pickup will likely be more elongated. Production side was pulled down by a deep contraction in manufacturing, construction, trade, hotel, transport sectors while the expenditure side was clearly pushed lower by heavy contraction both in consumption and investment,” Suvodeep Rakshit, vice president at Kotak Institutional Equities, said.

Public administration, defence and other services, which represent government expenditure, contracted by 10.3%. The gross fixed capital formation, a proxy for investment, was down 47%.

India’s April-July fiscal deficit too climbed at 103% of the Budget target versus 78% last year.

Chief Economic Advisor K Subramanian, however, said the worst was behind and India was experiencing a V-shaped recovery.

In contrast, China, where the pandemic originated, grew by 3.2% in April-June after recording a decline of 6.8% in January-March 2020.