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Indian economy may have contracted by 25% in Q1FY21: Icra

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Mumbai: Ratings agency ICRA says the Indian economy may have contracted by 25 per cent in the first quarter of the current fiscal year, making it one of the most pessimistic projections for Asia’s third-largest economy.

Last week, an ET poll of 11 economists suggested the economy may have contracted by as much as one-fourth in the June quarter because of the Covid-19 pandemic and the lockdown that ensued.

They warned that a recovery may take a while as the virus spreads and infection numbers rise, prompting further localised closures. Their contraction estimates ranged from 13.6 per cent to 25.7 per cent and are in line with those seen in other countries hit hard by the coronavirus.

Icra said it pegs the contraction in Indian GDP and the gross value added (GVA) at basic prices in year-on-year (YoY) terms in Q1 FY2021 at around 25 per cent each, as the 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.

The ratings agency said these sub-sectors, which together account for a sizable 45 per cent of the economy, are assessed to have suffered heavily in volume and profitability terms during the lockdown quarter.

“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,” Aditi Nayar, Principal Economist, ICRA said in a release.

According to Icra, the lockdown related to the Covid-19 outbreak, and the gradual unlock in various states, contributed to a sharp 40.7 per cent year-on-year (YoY) contraction in manufacturing volumes in Q1 FY2021.

It expects the manufacturing GVA to contract by 40-45 per cent in Q1 FY2021.

Nayar said, apart from 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 the ratings agency’s earlier expectations of the impact of the lockdown on profitability.

However, the cost-cutting measures would depress revenues and margins of other producers, including the MSMEs, for many of which data may be available with a lag at best, and may not, therefore, get captured in the initial estimates of the CSO for Q1 FY2021.

“Moreover, we caution that the divergence in the performance of the formal and informal sectors may not get fully represented in the GDP data, given the lack of adequate proxies for the latter. In addition, the lower wage bill would compress the GVA of the non-agricultural sectors,” said Nayar.

Given the halt in construction activity for 20 days in April 2020 as well as the uneven recovery thereafter, evidenced by the YoY contraction in key inputs such as cement and steel, and the decline in the pace of highway construction, ICRA expects a sharp contraction in the GVA of construction of around 45 per cent 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 per cent 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 per cent in Q1 FY2021, it said, adding that coupled with the 9.7 per cent growth in the central government’s non-interest revenue expenditure in Q1 FY2021, it would support the overall economic performance in that quarter.

Icra expects the growth of agriculture, forestry and fishing to rise to 5 per cent in Q1 FY2021 from 3 per cent in Q1 FY2020, driven by the healthy rabi harvest.

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