India Inc faces biggest contraction in over 20 years, says CMIE

India Inc is currently facing a deep contraction and it is broad-based across sectors and industries, according to a latest report by think-tank Centre for Monitoring Indian Economy (CMIE). The agency warned that the coronavirus outbreak could make it even bigger, longer and broad-based.

"The economy has been wading through the Coronavirus shock. The initial impact was supply shock as China came under a lockdown. Now, we could face a demand shock as India starts its attempts at containment. This could make the recession even bigger, longer and broad-based," the agency said in its economic outlook report.

According to CMIE, the contraction in the financial year 2019-20 (FY20) is 12.9 per cent, which is worse than the six per cent contraction recorded during 2008-09 following the global liquidity crisis. From manufacturing to mining, construction to electricity, every major sector reported a contraction in gross value added.

In the December quarter of this fiscal, the manufacturing sector saw a decline of 10.5 per cent, mining contracted sharply by 25 per cent, electricity by 4.5 per cent, non-financial services by 6 per cent and construction by 8 per cent. In the past two decades, such contraction was witnessed only once and that too in June quarter of 2010.

"It is deep as it is the biggest contraction in real value added in over 20 years," said CMIE, adding that all other contractions in the past 20 years have been much milder than these.

"While a recession is usually defined as contraction in real gross value added for two consecutive quarters, in India Inc, contraction in gross value added for three consecutive quarters has been common since 2008-09. This was not the case earlier," the report highlighted.

The report said that the fourth quarter also looks very vulnerable. "If the fourth quarter also records a contraction then this would be the most prolonged recession in 20 years," it said.

CMIE said that the broad-based nature of this recession can also be measured by the spread of the decline across the sectors during the last three quarters of this fiscal. Growth of five sectors (manufacturing, mining, electricity, non-financial services and construction) across three quarters yields 15 observations, of which ten were negative.

Comparing the trend over the past 20 years, it was observed that ten out of fifteen observations being negative was the worst performance and, besides 2019-20, there was only one instance in 2013 with a similarly poor performance, it said.

As per CMIE report, sectors that look very vulnerable in the wake of coronavirus haven't done too badly so far. Transport sector has slowed down but not declined. Hotels and tourism and retail trade have also pencilled small positive real growth. "But, these may see a downturn in the coming quarters. This could make the further broaden the spread of the recession in India Inc," it said.