What Do The Q2 Numbers Tell Us? Revival Is Closer Than It Appears

The Ministry of Statistics and Programme Implementation (MoSPI) released the Q2 estimates on Friday which revealed that the economic contraction in Q2 was at 7.5 per cent.

At the same time, the core sector witnessed a contraction of 2.5 per cent in October, making it the eighth-consecutive month of a decline.

This raises the critical question in the mind of many regarding the mixed signals that are emerging on the Indian economy.

However, to put things in perspective on the core sector growth, the decline is mainly due to a decline in production of crude oil, natural gas, refinery products and steel.

Before we look at the numbers, it is important to acknowledge that the GDP print is much better than what I, and many others had anticipated.

This is important as it reflects the sequential improvement in the level of economic activity, thereby suggesting that India could achieve the 2019-20 levels of economic output a lot sooner than what was originally anticipated.

The fact that CMIE shows a significant drop in unemployment, even if one factors in the reduced Labour Force Participation Rate suggests that there are jobs that are being added in the economy.

The important takeaway from the GDP print is that the revival in economic levels is largely because of the private sector, as Rahul Bajoria pointed that the GDP ex-Government Consumption fell only 6.8 per cent year-on-year.

That the revival is being assisted majorly by the private sector augers well — and with the government further loosening its purse strings in Q3 in the form of pre-festival season stimulus as per the two rounds of announcements, we can expect Q3 to be closer to 0, if not moderately positive.

Another important point worth considering is that the farm sector registered a growth of 3.4 per cent in the second quarter, while the manufacturing sector grew by 0.6 per cent.

This is consistent with the previous classification of considering the economy into essential services, contact services and the rest of the economy.

Based on that classification, we had argued that the rest of the economy will recover faster than contact services while essential services will not be affected by the pandemic.

This is the second quarter of growth for the agricultural sector, which is a major component of the essential services and it illustrates the limited impact of the pandemic.

Manufacturing had registered a contraction in the first quarter since lockdown restricted most of such industrial activity and that it is back to being positive is an encouraging sign.

Contact services, however, continue to contract and this should not come as a surprise.

Consider the tourism industry as an example. With very few people willing to travel at the moment, it should be no surprise that the sector is contracting.

A major issue with contact services even after relaxation of restrictions would be the heightened risk aversion which will prevent people from travelling in the near future.

This tendency may even continue post-the vaccination drive and it can have several long-term implications for the sector, not just in India but across the world.

As it happens, in Q2, trade, hotels and the transport sector contracted by 15.6 per cent, while government final consumption expenditure contracted by 22.2 per cent in Q2 after expanding by 16.4 per cent y-o-y in Q1.

The contraction in government expenditure is interesting — more so as the government front-loaded policy support during the pandemic and thus, due to lack of resources, it may have deferred some of its expenditure towards the second half of the financial year.

The third stimulus combined with the improvement in tax collections should, therefore, result in a higher outlay during the second half of the financial year, which could actually help accelerate the process of growth recovery.

So, the key question now is what to expect going forward on the economic front and the answer to that depends on various scenarios.

In the absence of a higher Covid-19-case load, timely arrival of a vaccine and government committing to its fiscal expenditures, we should see a sharp increase in level of economic activity in H2 compared to H1 which could further contain the level of economic contraction in the present financial year.

This would also imply that we may cover a part of the lost economic activity in levels a lot sooner than what was originally anticipated by many.

In the event of a higher Covid-19-case load or a delay in the arrival of a vaccine, the recovery may be prolonged, but, irrespective of the scenarios, we can expect a sharp revival in the level of economic activity in the second half of the current fiscal year.