Sent: Tuesday, September 1, 2020 1:45:44 AM
To:
Madam/Sir,
We are glad to enclose a copy of SBI Ecowrap titled "Q1GDP REVEALS DEEPER MALAISE: WE NOW ESTIMATE FY21 REAL GDP AT –10.9% (-6.8% PREVIOUSLY)" for your perusal.
India's GDP growth plunged to 23.9% in Q1 FY21 due to the nation-wide lockdown imposed on 25 Mar'20 in the wake of Covid-19 pandemic and is much worse than market and our estimates. This is India's worst growth performance since the country started reporting quarterly GDP data in 1996. In the 2004-05 base, India's lowest quarterly GDP growth was 1.66% in Q3FY03. Till now GDP growth data of 60 countries has been released. Apart from China and Vietnam all economies exhibited decline in growth. The average decline of 60 economies in Apr-June 2020 is 12.2% as compared to 1.4% decline in Jan-March 2020.
The only saving grace in these times is the growth of 3.4% in Agriculture & Allied activities, though the growth in nominal Agri GDP was at 5.7%, as against an average 13.5% in previous 2 quarters. This was expected as from the beginning itself Government has imposed least restrictions on this sector. Also till Jun'20 the spread of COVID-19 was primarily in urban areas and rural areas were almost unscathed from the pandemic. However, Q2 could see a reversal of sorts with rural areas now in grip of COVID-19. Industry is the worst affected sector with decline of 38.1% in Q1 FY21 as compared to 4.2% growth in Q1 FY20. Services sector exhibited a decline of 20.6% in Q1 FY21 in comparison to 5.5% growth in Q1 FY20.
As anticipated Private Final Consumption Expenditure (PFCE) growth collapsed as COVID containment measures reduced consumption to mostly essential items. With investment demand not seeing recovery due to unutilised capacity, the share of private consumption expenditure will remain on the higher side in overall GDP estimate. Assuming that it remains at 57% of GDP in nominal terms, we will see at least around 14% decline in PFCE growth in FY21, as against an average of 12% growth for the 9 year period ended FY20. This indicates an average swing of 26% in current fiscal indicating a consumption washout.
The curious case in the data is the Government Consumption which has expanded by 20% on the expenditure side but the Public Administration and Defence has contracted by 5%. We believe, Public Administration and Defence includes other services such as Education (private tuition/coaching centres), Health (Nursing Homes / Personal Care services) and other services such as Social and Personal services which were in a complete lockdown mode in Q1FY21. It is also possible that State Governments and particularly Local Bodies were in lockdown mode in Q1FY21 that impacted this number. The pandemic has significantly impacted expenditure pattern under individual consumption expenditure components like health and education.
After a decline of 23.9% real GDP growth in Q1 now the question arises how much growth will decline in subsequent quarters. It is now clearly visible that Q2 decline will also be in double digits. Our preliminary estimate indicates that all the four quarters of FY21 will exhibit negative real GDP growth and decline of full year growth will likely be in double digits ( around 10.9%). Q2 real GDP decline will be in the range of –12% to –15%, Q3: -5% to –10% and Q4: -2% to-5%. It seems that momentum of economic pick-up has slowed down in Q2 FY21 and our Business Disruption Index is nearly at the same level as on Aug 24 as it was at end June.
Amidst all these numbers, we hasten to add 2 positives. First, RBI sector-wise credit-data for the month of July indicates that except Industry, credit has increased in all other major sectors in July. There has been a significant increase in credit to MSE, Agri & Allied and Personal Loans. It is heartening to see that the banking sector has largely been able to insulate itself from the disruption due to greater technology integration and quick role out of work from home measures and banking being an essential service. Second, some of the sectors where new projects announcements were seen during Q1 include Roadways, Basic Chemicals, Electricity, Community Services such as Hospital, Water Sewage Pipeline etc.
We now believe sectors such as construction, trade and hotels, aviation need to be revived. Restoring transportation services and giving push to infrastructure by issuing special bonds to RBI like perpetual bonds must also be explored apart from supporting states through fiscal measures in their endeavor.
Warm Regards
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