INSTANT VIEW 4-India's economy shrinks 7.5% y/y in July-Sept quarter

BENGALURU, Nov 27 (Reuters) - India’s economy contracted 7.5% in the quarter to September, according to official data on Friday, showing some signs of a pick-up after the easing of pandemic restrictions that triggered a record contraction in the previous quarter.

The read-out for the September quarter was better than the 8.8% contraction forecast of analysts in a Reuters poll.

COMMENTARY: KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU “While farm sector growth was in line with our expectation, it appears that substantial inventory building in anticipation of pent-up and festival period-led demand provided a boost to the manufacturing activity.

That said, we believe that a rather low GDP deflator has resulted in higher-than-expected real GDP growth. But with signs of emerging fatigue in recent demand uptick and the second wave of infection already impacting economic activity, we would retain our view of FY21 real GDP contracting by 8.6%, given the likelihood of a much weaker third-quarter activity.”

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI “Growth data for Q2 indicates recovery in output from the sizeable negative shock in June quarter. Cushioned by agriculture growth and manufacturing output, economic activity improved during the quarter. In terms of drivers, a combination of pent-up demand, rural push and festive season demand likely underpinned this recovery. The improvement notwithstanding, GDP still declined by 7.5% y/y in Q2FY21.

The recovery will need to be carefully monitored due to lingering risks. After an uptick in early November, high frequency indicators are beginning to show fatigue. Possibility of dwindling pent-up demand and rising infections could limit broader gains.”

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI “The second quarter GDP growth number is better than our expectation. While growth in most segments was along expected lines, performance of two sectors surprised on the upside - manufacturing and trade, hotels and transportation.

Manufacturing is a relatively less contact-intensive activity compared to services. This could partly explain quick revival in the sector.

The resurgence of COVID cases in many geographies poses a risk to economic revival in the coming quarters. We expect growth to remain negative in the third quarter and post a small positive growth in Q4.”

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI “Bunching up of demand in September Qtr has helped lift YoY growth. In addition, manufacturing has benefited more from pent-up demand than high contact services. We believe personal safety and convenience were the root drivers of discretionary demand in auto and durables in Q2.

With the rapid pace of normalization of the economy, it is clear that the size of unaffected parts of the economy is far greater than the stressed sectors. Momentum in the recovery phase of the economy can be sustained by government spending, the vaccine and monetary policy tailwinds.”

VIVEK KUMAR, ECONOMIST, QUANTECO RESEARCH, MUMBAI “While the improvement vis-a-vis Q1 GDP growth of -23.9% is in sync with the phased ‘unlock’ of the economy, something which is also corroborated by several high frequency indicators, the leg-up seems to have come from the manufacturing and the utilities sector, with both of them recording positive growth in value add.

On the demand side, the drag from private consumption and investment has moderated. This augurs well and will provide upside risk to our FY21 GDP growth estimate of -9.5% as the intensity of phased ‘unlock’ has now gathered further momentum and the medium term outlook on trade/manufacturing appears constructive in the backdrop of global geopolitical changes and PLI based policy incentives for certain domestic industries.”

SREEJITH BALASUBRAMANIAN, ECONOMIST - FUND MANAGEMENT, IDFC AMC, MUMBAI “Economic data ahead would be crucial to gauge the quantum of ‘froth’ in this Q2 data from pent up, festive and inventory restocking demands and to also throw more light on the employment and wage situation. How the rate of cost-cutting done in Q2 by companies to improve profits moves, the domestic COVID infection rate in the next few weeks, the situation in our major export markets and the policy support there would all matter. Most important to see would be how flat the recovery leg eventually is and thus the hit to medium-term potential growth.”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI “The numbers were slightly better than expected. Most of the high frequency data were suggesting a V-shaped recovery. In line with that, we expect significant recovery in the quarter ending December. For the overall year, we expect the GDP contraction close to 8%. Still, inflation remains high and significant part of this rebound could be because of pent-up and festive demand.”

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL SERVICES, MUMBAI “Today’s statistics show that GDP contraction has narrowed, partly helped by decent agricultural growth and some pick up in manufacturing activities.

However, critical employment generating sectors like construction, mining and services continue to stay weak. This data needs to be interpreted with caution as India has a very large unorganised sector and the measurement of its value added was not feasible due to restrictions on the movement of data collectors.”

GARIMA KAPOOR, ECONOMIST - INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI “Today’s GDP print increases our confidence that recovery is gaining pace and is becoming more broad-based. While during the initial period of unlocking, rural economy’s buoyancy was supportive, urban demand too has begun to normalize in pre-festive period.

Although the resurgence of COVID cases in key cities in India as well as globally remains a risk, we believe that a significant part of the demand resurgence in India is attributable to Tier 3 and Tier 4 cities and rural India and hence the downside risks to growth remain capped. We retain our FY21 GDP growth forecast to -7%.” (Reporting by Nivedita Bhattacharjee, Nallur Sethuraman, Vibhuti Sharma and Sachin Ravikumar in Bengaluru, Editing by Aditya Soni)