Technically, India is into a recession.

Two quarters of negative growth means the economy is “officially” in recession.

But in these extraordinary times, this way, technically, almost the entire world (barring China) will be in recession.

As against wide-spread estimates of a 8.2% to 8.6% contraction, GDP for Q2 came in at much better at (-)7.5% v/s (-)23.9% and GVA contraction was at 7% v/s (-)22.8%. The improved GVA in manufacturing, electricity and farm production led to the lesser-than-expected contraction.

Contraction yes, but the silver lining here – the pace of contraction is coming down. In Q1FY21, GDP contracted 23.9%, which raised no eyebrows as during this period, India had the lockdown, bringing the economy to a grinding halt. And based on all other economic indicators, economic activity has slowly and steadily only picked up since July.

Insights into the numbers (QoQ):

• Agriculture – 3.4% v/s 3.4%
• Mining – (-) 9.1% v/s 5.2%
• Manufacturing – 0.6% v/s (-)39.3%
• Electricity, gas, water, public utilities – 4.4% v/s (-)7%
• Construction – (-)8.6% v/s (-)50.3%
• Trade – (-)15.6% v/s (-)47%
• Financial, realty, professional services – (-)8.1% v/s (-)5.3%
• Public Admin – (-)12% v/s (-)10.3%

In the absolute sense, GDP data that we got today, is outdated – we got a numerical connotation to the Q2 economic woes, something which we all experienced. But what we do lookout for within these numbers is an outlook for the future – an improvement between Q1 and Q2 indicates that things are getting better.

What we think are the highlights :

Growth in farm sector – good monsoon, extra fertilizer subsidy allocation of Rs.65,000 crore in FY21 over and above original Rs.71,309 crore led to a 3.4% growth in agriculture in July-Sept – exactly the same as it was in Q1.

After lifting of lockdown, the services sector performance in Q2FY21 – the most affected due to the pandemic; this sector comprising of trade, hotels, transport, communication and services has done much better. Though it is still a contraction, the fall has come down sequentially.

Manufacturing sector bounce back – it has shown a growth of 0.6% and this is probably because electricity and utilities and mining in Sept contributed majorly and we could see a much better number in Q3. July was very chaotic and supply constraints remained and yet, the manufacturing bounced back sharply on the back of one-and-half month during the quarter – impact of suppressed demand?

Public spending - 11.5% contraction in private spending and this will happen till the gloom of the pandemic does not go as concentration will be more on saving. (-)12.2% v/s (-)10.3% sequentially in Govt spending means that we could see this going up in H2FY21.

On the infrastructure output front, it contracted 2.5% in Oct v/s (-)0.8% (MoM) – a straight fall for the eight month. Coal, fertilisers, electricity and cement sectors showed growth during the month.

Looking ahead, we cannot really expect much in terms of policy action from RBI but we need to remain alert to the pandemic rising again, the second wave as it is referred to, impacting growth towards end of Q3 and maybe into Q4. There might not be a complete lockdown, manufacturing sector will not be impacted but services might continue to lag.

We might end FY21 with a (-)8 to (-)8.5% and not the double-digit as was expected earlier - that's probably the positive which we should take home.