ICRA: GDP to contract by 25% in Q1 FY2021 dampened by industry, services

Manufacturing, construction, and trade, hotels and transport key affected sectors during lockdown quarter
ICRA 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% each. 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. 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.

According to Ms. Aditi Nayar, Principal Economist, ICRA Ltd, “ICRA projects the Indian GDP and GVA (at constant 2011-12 prices) to have contracted by about 25% each in Q1 FY2021. 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.”

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. 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. Overall, we expect the manufacturing GVA to contract by 40-45% in Q1 FY2021,” Ms. Nayar added.

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% in Q1 FY2021. However, low fixed costs and curtailed payments to contract labour in line with the decline in actual activity, would have protected the margins of construction companies.

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.

Additionally, the 3rd Advance Estimates of crop production, released in May 2020, had forecast a favourable trend, with record production of several rabi crops. “Driven by the healthy rabi harvest, we expect the growth of agriculture, forestry and fishing to rise to 5.0% in Q1 FY2021 from 3.0% in Q1 FY2020,” Ms. Nayar said.