What GDP At -24%, Worst Among Major Economies, Means For India

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India's economy posted the biggest contraction among major economies last quarter, with a recent surge in coronavirus infections weighing on the outlook for any recovery.

Gross domestic product shrank 23.9 per cent in the three months to June from a year earlier, the Statistics Ministry said in a report Monday. That's the sharpest decline since the nation started publishing quarterly figures in 1996, and was worse than any of the world's biggest economies tracked by Bloomberg. The median estimate in a survey of economists was for an 18 per cent contraction.

Once the world's fastest-growing major economy, India is now on track for its first full-year contraction in more than four decades. While there are early signs that activity began picking up this quarter as lockdown restrictions were eased, the recovery is uncertain as India is quickly becoming the global epicenter for virus infections.

India reported more than 78,000 new infections on Sunday, the most by any country, with total cases nearing 4 million in a nation of 1.3 billion. That could delay the consumption-driven economy from fully reopening.

“While the start of the July-September quarter has likely benefited from a post-lockdown boost, those gains are already at risk of being lost amid the ongoing pandemic and New Delhi's hesitance to open the fiscal taps,” said Priyanka Kishore, head of India and Southeast Asia economics at Oxford Economics Ltd. in Singapore.

Plunging Output

The yield on India's 10-year government bonds fell three basis points to 6.12 per cent ahead of the data, with the securities capping their worst monthly decline in more than two years. The rupee weakened 0.3 per cent to 73.62 per US dollar.

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Details of the GDP report:

  • Financial services — the biggest component of India's dominant services sector — shrank 5.3 per cent last quarter from a year ago.
  • Trade, hotels, transport and communication declined 47 per cent
  • Manufacturing shrank 39.3 per cent, while construction contracted 50.3 per cent
  • Mining output fell 23.3 per cent, and electricity and gas dropped 7 per cent
  • Agriculture was the lone bright spot, growing at 3.4 per cent

A mix of monetary and fiscal measures so far to prop up the economy won't prevent it from sliding into recession. The government has provided only limited fiscal support given constraints on revenue growth, while the central bank has cut interest rates by 115 basis points so far this year, boosted liquidity and transferred billions of rupees in dividends to the state.

A separate report on Monday showed the government already breached its full-year budget deficit target in the first four months of the fiscal year that began April 1 as revenue receipts collapsed.

What Bloomberg's Economists Say

The result is likely to jolt the government's fiscal conservationist mindset, which has announced expenditure cuts and argued that available fiscal space should be utilized only once the virus is brought under control. With new cases still surging, we believe the longer the government delays an increase in fiscal spending, the deeper the scars will be.

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