Q2 GDP

 GDP contracts 7.5%, but India may have just escaped recession 

On 27 November 2020 when Q2 GDP was announced, there was a sense of anxiety and expectation. The Q2 GDP contracted -7.5%, but it is actually a lot better sequentially and also better than what the street had anticipated. 

It’s the context that matters 

The financial press was rife with stories of how India had entered recession. The traditional definition of recession is GDP contracts for 2 quarters in succession. So technically, this is a recession but it hides a cheerful reality. The contraction in GDP has improved from -23.9% in Q1 to -7.5% in Q2. That clearly shows that the momentum is in favor of recovery. The key takeaway is that construction and manufacturing; two important lead indicators, have shown a solid recovery from the lows of Q1. From a trickle-down perspective, that is good news! 

Manufacturing turns positive 

For the manufacturing sector, the sharp turnaround from -39.3% to +0.6% is much beyond most optimistic estimates. The turnaround has been driven by a slew of sectors indicating a sharp pick-up in capital and consumer demand. An important indicator is that utilities like power have led the recovery and this sector has actually led the growth. The strong Kharif has kept agriculture solid at 3.4%. In short the recovery in the primary and the secondary sectors is not only encouraging but also significant. 

Tertiary sector still lags 

The tertiary sector or the services sector that accounts for nearly 60% of the GDP continues to be tepid. That is the reason the GDP growth is still in the negative. Let us look at some buckets. Trade and hotels have shown a bounce but the problems are structural in nature. Public services have taken a big hit as fiscal deficit has put pressure on government spending plans in social welfare. The all-important financial services has actually seen a worsening in Q2 compared to Q1 as the lending activity is yet to pick up in a big way. But what is encouraging is that the construction and allied services sector is picking up and that has very strong externalities. That is what the economy can bet on in the next few quarters, which will be critical. 

Real test will be Q3 and Q4 

The lesser than expected contraction in the second quarter has triggered hopes that the economy could turn to positive growth in the current fiscal itself. While it is too early, the high frequency data like core sector, PMI and IIP for the next couple of months will hold the key. Normally, when there is a V-shaped recovery in the economy, there are the breaks in growth as the economy adjusts to reality. Trade is still way below pre-COVID levels and consumer demand continues to be elusive at the grass-root level. These could be bigger challenges in next few quarters!