India to emerge out of COVID-induced recession in Dec quarter: ICRA

Bolstered by revival in private consumption and government spending, India is set to exit the recession caused by the coronavirus pandemic in the third quarter of this fiscal, projected rating agency ICRA. The agency estimated Indian economy to record a rise of 0.7 per cent in Q3 FY21, after two very unfavourable quarters.

The forecasted growth in Q3 FY2021, while undoubtedly mild and uneven, is nevertheless welcome, as it signifies that the economy has exited the COVID-19 pandemic-induced recession, ICRA said in a statement on Tuesday. The GDP figures for the December quarter are scheduled to be released on February 26.

However, there is still a long way to go, as certain sectors are still feeling the pinch of the COVID-19-induced disruption, said Aditi Nayar, Principal Economist, ICRA.

"Encouragingly, almost all the non-agricultural lead indicators that we track recorded a continued, albeit uneven, improvement in volume terms in Q3 FY2021. This pickup benefitted from the continued unlocking of the economy, uptick in consumption during the festive season, as well as higher central government spending. Moreover, most of the tracked indicators rebounded to a growth on a YoY basis in that quarter, although this was on the low base of Q3 FY2020," Nayar said.

ALSO READ: Credit Suisse upgrades India to overweight; projects greater scope for rate cuts

"The outliers that continued to contract in Q3 FY2021 included sectors such as aviation, reiterating that the contact-intensive portion of the economy will take longer to recover," she further pointed out.

Government expenditure will play a major role in India's economic revival, ICRA noted. After recording a YoY decline of 14.2 per cent in Q2 FY2021, Government of India's non-interest revenue expenditure increased 22.9 per cent in Q3 FY2021. Moreover, for the 19 state governments - Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Mizoram, Nagaland, Odisha, Punjab, Rajasthan, Sikkim, Telangana, Tripura, Uttar Pradesh and Uttarakhand - revenue expenditure marginally rose by 0.4 per cent last quarter after contracting 14.3 per cent in Q2 FY2021.

"ICRA expects that the revival in central government spending supported the Indian economy's exit from the recession in Q3 FY2021," Nayar said.

Centre's capital expenditure and net lending increased by a significant 117.7 per cent in Q3 FY2021, in contrast to the contraction of 39.1 per cent in Q2 FY2021, ICRA mentioned. The capital outlay of the aforementioned 19 state governments continued to contract, although the pace of the YoY decline narrowed to 14.1 per cent in Q3 FY2021 from 41.8 per cent in the previous quarter, it added.

Regarding private consumption, consumer confidence only saw a modest growth, due to weaker recovery in the informal and contact-intensive sectors, as evinced in the Reserve Bank of India's (RBI) Consumer Confidence Survey.

ALSO READ: Indian economy on track for recovery from upcoming fiscal, says S&P

"In contrast, healthy kharif output and crop procurement continued to buoy rural farm sentiment. Moreover, the migration of labour back to urban areas is expected to have restarted remittances and added to the consumption of the non-farm part of the rural economy, ICRA stated.

Overall, consumer durables production increased by a healthy 6.4 per cent in Q3 FY2021, in contrast to a contraction of 9.8 per cent in Q2 FY2021, while the growth in consumer non-durables rose to 2.5 per cent from 0.4 per cent, respectively, ICRA said.

The contraction in capital goods narrowed to 1.1 per cent from 12.8 per cent, respectively, suggesting that gross fixed capital formation recovered further in Q3 FY2021 despite the subdued momentum of new project announcement and completion.

ICRA expects the gross value added (GVA) at basic prices to have risen by 0.7 per cent in Q3 FY2021, in contrast to the 7.0 per cent contraction in Q2 FY2021, led by industry (to +2.1 per cent from -2.1 per cent) and services (to -1.1 per cent from -11.4 per cent), with a steady performance of agriculture, forestry and fishing (to +3.5 per cent from +3.4 per cent).

"In our assessment, the formal part of the Indian economy has shrugged off the pandemic blues and is gaining traction at the cost of the smaller and less formal segment. This is hastening the process of the formalisation of the economy and contributing to a consolidation in favour of the larger and more reputed players in certain sectors. While the informal and contact-intensive sectors will certainly heal more gradually, the lack of adequate proxies constrains a deeper analysis of the state of their recovery,"

ALSO READ: 'GDP to grow at 13.5% in FY22; economic activity on verge of normality': Nomura