India technically enters Recession as Q2 GDP Shrinks by 7.5%

Created on 28 Nov 2020

Wraps up in 5 Min

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Updated on 10 Sep 2022

gdp of india 2020

The year 2020 will go down in history as one of the weirdest and most disturbing years. With the coronavirus pandemic pushing many global economies deep into decline, many significant global events such as the US elections also made this year full of many economic discrepancies.

This year has been so full of ups and downs, that even the moment of an economic recession is being seen as a glimmer of hope.

The first quarter of this fiscal year was depressing for almost the entire world. Countries like the UK, France, Italy, Spain, Mexico, Singapore, Japan, to name a few, were all caught in a period of grave economic decline. And not surprisingly, India topped this list, with its Q1 GDP contracting by a massive 23.9%.

However, after the results of the first quarter, and the apparent "slowdown" of the pandemic, India, just like many other countries in the world, started unlocking the economy gradually. Businesses were once again back on the market, trying to get back up on their feet.

Unfortunately, though, India officially entered recession in the second quarter. The GDP data which was released yesterday showed that the Indian economy has shrunk by 7.5% in Q2. This is the second consecutive negative GDP. Technically, when an economy faces a negative GDP growth for two consecutive quarters, it is said to have officially entered the recession period.

Now, as grave as the word 'recession' sounds, this situation is being considered as a sign of a speedy economic recovery, and positive numbers are expected ahead.

Let's understand how.

What has happened?

According to the official data released on Friday, the Gross Domestic Product (GDP) of India contracted by 7.5% in the second quarter period from July-September. This indicates that after two consecutive negative GDP figures; India has officially entered its first recession, since 1996, when the country began keeping quarterly records.

Despite the negative figure, this data is a sign of a speedy, positive recovery as the economy rebounded from the record economic decline of 23.9% in the first quarter, which was a result of the Covid-19 induced nationwide lockdown.

Also, this performance came in as quite a surprise to most as the numbers were much better than what was anticipated. An economic poll by news agency Reuters had predicted that India's GDP reading of the second quarter would be around 8.8%, while RBI had forecast a contraction of 8.6%.

Proving the experts wrong, India, even though in a phase of recession, has shown a positive road ahead, and thus, this figure is quite relieving for the markets.

Which sectors are leading the way towards recovery?

The period of the second quarter from July-September this year was a time when most of the economy was still "unlocking" itself. Even though the government had started re-opening the economy gradually, the pandemic was still at large, which thus reflected a positive performance only in a handful of sectors.

The current data shows that only three out of eight economic sectors saw positive growth. Sectors like agriculture, manufacturing, and utility services like water, gas, electricity marked growth. The agriculture sector grew by 3.4%, manufacturing by 0.6% from -39.9% in Q1, and electricity gas, water supply, and other utility services grew by 4.4% from -7.0% in Q1 of the current year.

This positive growth, especially in the agriculture and manufacturing sectors raises glimmers of hope as, after the recent announcement of the coronavirus vaccine, the government is prepping up for the distribution of coronavirus vaccines to a country with about 140 crore people.

The data also showed that consumer spending, which is considered as the main driver of the economy, dropped 11.3% year-on-year in July-September as compared to a revised 26.7% fall in the last quarter. On the other hand, the capital investments were down 7.3% as compared to a 47.1% fall in Q1.

According to the Chief Economic Adviser at the Ministry of Finance Krishnamurthy Subramanian, "The Q2 GDP numbers are encouraging". He said that considering this growth in the farming and manufacturing sectors; there were signs of a "V" shaped recovery which will be encouraged by increased demand for consumer and investment goods.

Where does India stand?

Even though these figures have indicated signs of a positive, 'V-shaped' recovery for India, other countries around the world have shown much better results. Even though India has shown better performance than what was expected, it still stands behind many countries.

Source: Business Standard

This data shows that while China has once again proved to be a fantastic economic player by making a banging comeback, it's still a long road ahead for nations like Japan and Europe.

The Way Ahead

India still has a long way ahead to make a complete positive recovery. This year was an economically depressing year on an already slowed down economy, which was triggered by the sudden coronavirus induced lockdown, which led to newfound levels of unemployment with thousands losing their jobs, economic activities coming to a halt as a major chunk of the workforce was staying indoors, and markets staying closed.

As a result, this latest data brings in hopes of a speedy recovery. This next quarter can pave the way towards a positive GDP figure as the economy has been unlocked completely. With the busy and bustling festive season to the recent announcement of the coronavirus vaccine, the economy is being expected to revive itself swiftly in the coming quarters.

Many economists are expecting the economy to return to expansion mode as early as in the December quarter, as the pickup sustains.

According to NDTV business, they predict a contraction of 3% in the December quarter, followed by an expansion of 0.5% in the final January-March period of the financial year 2020-21 on hopes of better consumer demand fuelled by progress on coronavirus vaccines.

Recently, the government has also announced additional stimulus measures under its Atmanirbhar Bharat series of announcements. The RBI has also hinted at continued monetary policy support to revive the economy. The central bank has infused liquidity and transferred crores of rupees in the dividend to the government.

This quarter has seen increased liquidity in the banking sector, whereas the automobile sector and consumer durables have also seen an increase in their sales. The businesses are doing better, slowly trying to repair themselves from the massive damages, thus indicating a positive sign of economic recovery.

However, these are just trends. A report by Oxford Economics released earlier this month said that India would be the worst-affected economy even after the pandemic eases, stating that annual output would be 12 percent below pre-virus levels through 2025.

According to the Economic Times, "India's economy had struggled to gain traction even before the pandemic, and the hit to global activity from the virus and the lockdown combined to deal the country a severe blow. The shutdown in the vast country of 1.3 billion people left huge numbers of people jobless almost overnight, including tens of millions of migrant workers in the shadow economy."

Although we are seeing a positive sign of recovery, what's important to remember is that India has entered the recession. So, is the worst really over for the Indian economy?

We'll leave that to your thoughts.

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Anuja Khandelwal

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Anuja Khandelwal is a finance content writer at Finology. With a bachelor’s degree in Management and a master’s in mass communication and journalism, Anuja started writing blogs as a hobby, which later turned into passion. Together, with her passion for writing and interest in Finance, she wishes to create unique infotainment through her words.

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