Q2 GDP: What Do We Read Into It?

India enters a technical recession with two consecutive quarters of economic growth contraction. The GDP contracted by 7.50% in Q2FY21, as against the 23.90% contraction seen in Q1. It is pertinent to note that the rate of GDP growth is at an 11-year low, as compared to 4.20% in 2019-20, and an expansion of 6.10% in 2018-19. Therefore, it is to be understood that the slowdown in growth accentuated, and it converted itself into a recession, with the pandemic and the consequent lockdown, and the demand destruction that followed.

A reversion to normalcy was expected as soon as the situation improved, which is reflected in the slowdown in the sluggishness, seen in the Q2 numbers. Contrary to the general expectation of a contraction of around 8%, the number at 7.50% looks much better, but that is no guarantee of any sustained improvement unless the government spends more. The Keynesian prescription for recession is pushing up aggregate demand through government spending. And it works. But one should draw comfort from the fact that the GDP number is better than expected, and the final GDP number for the whole year may be a shade better than what was thought before, could be somewhere between -7% and -8%. This also assumes that growth may be positive, at least mildly positive, in the coming two quarters.

While agriculture remains at 3.40% growth, other key components like mining, construction, hotels, transport, and real estate remain in the contractionary or negative mode. Some of these areas are labour intensive, and their dependence on even migrant labour is extremely high, like construction and real estate. Unless labour moves in, full recovery in these sectors may take much more time. A closer reading of the GDP numbers, along with core sector and IIP numbers would make better sense of some of the sectoral lags. The data on small businesses and smaller corporates, and informal sector, also needs to be incorporated to see the actual ground level improvements, which happens at a later stage.

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