Indian Economy Growth: GDP Q2 FY21 - Much better than expected and H2 FY21 looks promising
India is officially under a technical recession for the first time in the known history of the country. Despite this, the rebound, especially of manufacturing, fixed investment and exports, have been ahead of expectations. Positive net exports on the demand side and resilience of agriculture and V-shaped recovery in manufacturing, on the supply side, led the recovery.
As expected, India has entered its first technical recession. Yet, -7.5% decline in GDP growth during Sep’20 was better than expected. Positive net exports, better than expected manufacturing recovery and modest improvement in investment rate raise hope for H2 FY21, Fiscal conservatism and subdued consumption are the key concerns.
Decisive improvement: With -7.5% growth in quarter ending Sep’20 on the back of a -23.9% growth in the previous quarter, India is officially under a technical recession for the first time in the known history of the country. Despite this, the rebound, especially of manufacturing, fixed investment and exports, have been ahead of expectations. Positive net exports on the demand side and resilience of agriculture and V-shaped recovery in manufacturing, on the supply side, led the recovery.
A mixed bag: Despite better-than-expected recovery, subdued private consumption and services activities remain causes for concern. Conservative fiscal stance led to sharp contraction in government consumption during the quarter ending Sep’20. While this will have salutary effect on containing the fiscal deficit, the implications for economic recovery can be negative.
Encouraging prospects: With the simultaneous cautious removal of lockdown restrictions and flattening of the infection curve, the outlook for H2 FY21 looks promising. While we were earlier expecting India‘s full year real growth to contract by close to 10%, we now estimate that the economy will shrink by 9% during FY21.
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Easy monetary policy to continue, fiscal stance remain uncertain: The unexpected hardening of retail inflation has compelled the RBI to hold back cut in policy rates. Inflation, however, is driven mainly by high food prices. Anand Rathi expects retail inflation to start softening from Nov’20 and the RBI to resume rate cut during Q4 FY21. With the current conservative fiscal stance, however, they are not sure the fiscal policy will be as accommodative in H2 as it was in H1 FY21.
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