Indian economy expected to contract by around 25 per cent in the first quarter of FY’21: Report

MUMBAI: The economy is expected to contract by 25 per cent each in the first quarter of FY’21 both in terms of GDP ( gross domestic product) as well GVA (gross value added) according to ratings firm Icra.

Despite a 40 per cent drop in manufacturing and minimal activity in the service sector, the higher expenditure by states and the central government in a bid to contain the pandemic and support the weaker section is expected to rein in the contraction in the economy,

The Q1 economic performance was primarily weighed down by the considerable drag imposed by three key production sub-sectors, namely manufacturing, construction, and trade, hotels, transport, communication and services related to broadcasting. These sub-sectors, which together account for a sizeable 45% of the economy, are assessed to have suffered heavily in volume and profitability terms during the lockdown quarter, Icra said.

” Our assessment draws from the available data for volumes and profitability for the industrial and services sectors, the expectation of distress in the MSME and the relatively informal sectors, as well as the favourable rabi harvest and government revenue spending.” said Aditi Nayar, Principal Economist, Icra.

The lockdown related to the Covid-19 outbreak, and the gradual unlock in various states, contributed to a sharp 40.7% YoY contraction in manufacturing volumes in Q1 FY2021. In addition to lower raw material prices, pared down employee costs and other cost-cutting measures appear to have protected the margins of various listed companies as compared to our earlier expectations of the impact of the lockdown on profitability, according to Nayar added. Icra also expects a sharp contraction in the GVA of construction of around 45% in Q1 FY2021.

The impact of the Covid-19 outbreak and the restrictions on travel, tourism and hospitality adversely impacted the service sector performance in Q1 FY2021. Based on the trends displayed by the lead indicators, including the halving in the generation of GST e-way bills in Q1 FY2021 relative to the year-ago period, ICRA expects a contraction of 50-55% in the GVA of trade, hotels, transport, communication and services related to broadcasting in that quarter.

However, the revenue expenditure of a small set of state governments for which data is available, expanded by 18.5% in Q1 FY2021. This, coupled with the 9.7% growth in the Government of India’s non-interest revenue expenditure in Q1 FY2021, would support the overall economic performance in that quarter, Icra said.