ICRA projects the year-on-year (YoY) contraction in Indian GDP (at constant 2011-12 prices) to have narrowed appreciably to 9.5% in Q2 FY2021 from 23.9% in Q1 FY2021, as the economy recovered from the lows of the pandemic-induced lockdown. Similarly, the contraction in the gross value added (GVA) at basic prices is expected to have moderated considerably to 8.5% in Q2 FY2021 from 22.8% in Q1 FY2021, led by industry (to -9.3% from -38.1%, driven primarily by manufacturing and construction) and services (to -10.2% from -20.6%).
A substantial recovery in manufacturing and construction is likely to underpin the expected improvement in the performance of the industrial GVA in Q2 FY2021. Various sectors of manufacturing recorded an improvement in demand and volumes in Q2 FY2021, although the performance was admittedly uneven.
In addition to the continued cost-cutting measures, the availability of raw material inventory that had been procured previously at subdued costs supported the earnings of the manufacturing entities in the just-concluded quarter relative to Q1 FY2021. We expect the contraction in manufacturing GVA to narrow considerably to around 10% in Q2 FY2021 from 39.3% in Q1 FY2021. Nevertheless, the extent of the recovery in the performance of the informal sectors in Q2 FY2021 remains unclear, and we caution that trends in the same may not get fully reflected in the GDP data, given the lack of adequate proxies to evaluate the less formal sectors.
The robust recovery in the performance of key inputs of construction such as cement and steel, and healthy Central Government awards in roads and railways during Q2 FY2021, stood in contrast to the contraction in the outgo towards capital spending by the Government and the private sector. Moreover, labour availability challenges persisted in some regions. Driven by the trend in inputs and Central Government awards, ICRA expects the contraction in construction GVA to narrow to around 12% in Q2 FY2021 from the sharp 50.3% in Q1 FY2021.
The lead indicators of the trade and transport sectors, such as railway revenue-carrying freight, generation of GST e-way bills, service sector exports and diesel consumption displayed a marked improvement in their YoY performance in Q2 FY2021, relative to the previous quarter. However, the Covid-19 pandemic continued to adversely affect demand in the contact-intensive sectors such as tourism, hospitality, and recreation in that quarter. Based on the improvement in trade and transport, ICRA expects the contraction in the GVA of trade, hotels, transport, communication and services related to broadcasting, to have narrowed appreciably to ~25% in Q2 FY2021 from 47% in Q1 FY2021, while remaining substantial.
The healthy pace of expansion of the GoI’s spending in Q1 FY2021 had prevented an even sharper fall in the GDP in the lockdown quarter. With the expenditure management measures that have been put in place, the momentum reversed in Q2 FY2021, despite the fiscal stimulus that has been announced so far.
We fear that the shrinkage in Government spending may have capped the pace of the economic recovery in Q2 FY2021, said the rating agency. However, the performance of other services, such as education, health etc. would have revived in Q2 FY2021, relative to the situation during the lockdown. Accordingly, ICRA expects the contraction of the GVA of public administration, defence and other services to narrow mildly to ~8.0% in Q2 FY2021 from 10.3% in Q1 FY2021.
The GoI's non-interest revenue expenditure displayed a YoY contraction of 14.2% in Q2 FY2021, in contrast to the growth of 9.7% in Q1 FY2021. Moreover, for the 17 state governments for which data is available, revenue expenditure contracted by 7.9% in Q2 FY2021 compared to the growth of 12.4% in Q1 FY2021.
The ample early rainfall had supported the brisk sowing of the kharif crops, and the total acreage increased by 4.8% in 2020 relative to 2019. Driven by the healthy kharif harvest, we expect the GVA growth of agriculture, forestry and fishing to be pegged at 3.0% in Q2 FY2021, said the rating agency.
