India’s Q2 GDP Contracts by 7.5%

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India's Q2 GDP Contracts by 7.5% from a record contraction of 23.9% in last quarter, Q1 FY21, as Economy sees a sharp rebound sequentially.

Q2 GDP Highlights – Economy Sees a Sharp Rebound QoQ


India’s Q2 GDP Contracts by 7.5% from a record contraction of 23.9% in last quarter, Q1 FY21, since the Economy sees a sharp rebound sequentially. The National Statistical Office released India’s Gross Domestic Product (GDP) numbers for the second quarter (July-September), on Friday, November 27, 2020.

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India GDP Contracts by 7.5% in Q2 FY21

What is Gross Domestic Product (GDP)?
  • GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.
  • GDP growth rate is an important indicator of the economic performance of a country.

Q2 GDP Highlights

India's GDP Contracts by 7.5% in Q2 FY21
India’s Q2 GDP Contracts by 7.5%
  • In the second quarter (Q2 FY21), India’s GDP numbers contracted by 7.5% YoY after a record slump in the previous quarter, Q1 FY21.
  • In the previous quarter, the economy had contracted by 23.9% in GDP as output plunged due to the coronavirus induced lockdown in the country through the month of April and May.
  • However, the economy’s performance between July and September when lockdown restrictions were eased, is better-than-expected.
  • In the last year same quarter, Q2 FY20, GDP growth rate was 4.4%.
  • For H1:FY21, GDP contracted by 15.7% as against the growth of 4.8% in H1:FY20.
  • On November 26, 2020, the day before GDP release, RBI Governor Mr. Shaktikanta Das, had ‘nowcast’ that Q2 FY21 was set for the GDP contraction of 8.6%. The, the Q2 GDP estimates released by NSO beats the RBI’s nowcast also, which is a positive sign.
  • However, India has now entered a technical recession with two successive quarters of negative growth ie. -23.9% in Q1 FY21 and -7.5% in Q2 FY21. Lets understand what is Technical Recession.
What is Technical Recession?
  • A term – Technical Recession is used to describe two consecutive quarters of decline in output. In the case of a nation’s economy, the term usually refers to 2 sequential contractions in real GDP.
  • What is the difference between Technical Recession and Recession?
    • The most significant difference is that the ‘Technical Recession’ term is mainly used to capture the trend in GDP.
    • On the other hand, ‘Recession’ encompasses an appreciably more broad-based decline in economic activity. It covers several economic variables including employment, household and corporate incomes and sales at businesses.
    • Another key feature of a technical recession is that it is most often caused by a one-off event (in this case, the COVID-19 pandemic and the lockdowns imposed to combat it). Also, technical recession is generally shorter in duration than recession.

Decoding Q2 GDP : Sector-wise Growths

  • Quarterly Gross Value Added (GVA) sees a contraction of 7% in Q2 FY21 over Q2 FY20. The GVA contraction in Q1 FY21 was 22.8%.
  • Agriculture, which was the only sector to record growth in Q1 FY21, grew at the same pace of 3.4% in the second quarter also, Q2 FY21. The sequential flat growth of Agriculture sector came in slightly lower than estimates.
  • While, the better-than-expected Q2 GDP data was largely driven by :
    1. Positive numbers in manufacturing (0.6% vs -39.3% in Q1) and electricity (4.4% vs -7% in Q1)
    2. Lower contraction in Mining (-9.1% vs -23.3%), Construction (-8.6% against -50.3%), Trade and hotels segments (-15.6% against -47%)
  • The Sectoral Breakup is as follows:
India Q2 FY21 GDP : Sectoral Breakup
India Q2 FY21 GDP : Sectoral Breakup
  • The positive growth in Manufacturing which was anticipated on account of Bunching up of demand in the September quarter.
    • Manufacturing has benefitted more from pent-up demand than high contact services.
    • Personal safety and convenience is the root driver of discretionary demand in auto and durables in Q2. Auto sales data for last few months was quite strong amid festive season.
  • While the sharp improvement in ‘Trade, hotels & transportation’ is a surprise.

FY21 Outlook

  • With the rapid pace of normalization of the economy, is it clear that the size of unaffected parts of the economy is far greater than stressed sectors.
  • Strong Growth Momentum built in Economy-linked Sectors : Agriculture & Allied activities, Auto (Tractors, 2W, Passenger Vehicles), Drugs & Pharma, Steel, Energy
  • Thus, Financials, Telecom, Technology, Healthcare, and Automobiles are expected to contribute to incremental growth in FY21, while Utilities, Capital Goods, O&G, and Retail are expected to trail.
  • Momentum in the recovery phase of the economy can be sustained by government spending, the vaccine, and monetary policy tailwinds. 
  • With the better-than-expected recovery in the economy, FY21 GDP projection is improved. FY21 could see a contraction of 6-7.5% from the RBI’s projection of 9.5% contraction.

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