India Emerged Out of Technical Recession | 01 Mar 2021

Why in News

The Indian economy has emerged out of technical recession as it grew at 0.4% in the third (October-December) quarter of 2020-21 with improvement in manufacturing, construction and agriculture.

  • The Gross Domestic Product (GDP) had contracted by 24.4% and 7.3% in the April-June and July-September quarters, respectively, marking a technical recession in the aftermath of the Covid-19 pandemic.
  • A technical recession is when a country faces a continuous decline for two consecutive quarters in the GDP.

Key Points

  • Growth Projections:
    • For the full fiscal year (2020-21), the National Statistical Office (NSO) has projected a contraction of 8%, higher than the forecasts of the Economic Survey (7.7%) and the Reserve Bank of India (7.5%).
    • The real GDP growth estimate for the third quarter (2020-21) is at 0.4%. In the corresponding quarter last year, the economy had grown 3.3%.
    • For the April-June quarter (Q1) and July-September (Q2), the contraction numbers were revised from 23.9% to 24.4% and 7.5% to 7.3%, respectively.
  • Growth Across Major Sectors:
    • Industries and Services Sector:
      • With improved performance of manufacturing, electricity and construction, industry recorded a growth rate of 2.6% in the third quarter against the contraction in the first two.
      • However, services, with the largest share in GDP at 57%, still remained in the contraction zone with a 0.9% fall year-on-year.
        • Financial, real estate and professional services grew 6.6% as against 9.5% contraction in the previous quarter and 5.5% growth in the corresponding period last year.
        • Mining, trade, hotels, transport, communication and broadcasting services and public administration services continued to stay in the negative territory in the third quarter registering a contraction of 5.9 %, 7.7%, and 1.5%, respectively.
    • Cores Sector Output:
      • India’s eight core sectors recorded a meagre 0.1% rise in output in January 2021, propped up by a 5.1% rise in electricity, 2.7% growth in fertilizers and 2.6% growth in steel production, even as the other five sectors contracted.
      • Coal, crude oil, natural gas, refinery products, and cement recorded negative growth in January.
      • The eight core industries constitute 40.27% of the Index of Industrial Production.
    • Agriculture:
      • Growth in agriculture jumped 3.9% in October-December compared with 3% growth in July-September and 3.4% growth during the corresponding quarter last year.
  • Reasons:
    • New Investment:
      • The positive momentum seen in investment demand (Gross Fixed Capital Formation - GFCF) as it grew by 2.6% in the third quarter after being in doldrums for several quarters now.
        • GFCF: It is essentially net investment. It is a component of the Expenditure method of calculating GDP.
      • This is the result of unrelenting efforts of the government to go all-out to revive investments under the ambit of the various measures which formed a part of the Atma Nirbhar Bharat package.
      • Going forward, the growth stimuli available from the Union Budget 2021-22 and the additional measures including the Production-Linked Incentive (PLI) will lead to a strong growth path over the recovery horizon.
    • Increase in Centre’s Capital Expenditure:
      • The resurgence of Government Final Consumption Expenditure (GFCE) in Q3 and Centre’s capital expenditure increased year-on-year by 129% in October, 249% in November and 62% in December.
        • GFCE is an aggregate transaction amount on a country's national income accounts representing government expenditure on goods and services that are used for the direct satisfaction of individual needs (individual consumption) or collective needs of members of the community.
    • V-shaped recovery:
      • The Q3 GDP numbers showed the success of the government’s initial policy of “lives over livelihood”. “The sharp V- shaped recovery has been driven by rebounds in both Private Final Consumption Expenditure (PFCE) and Gross Fixed Capital Formation (GFCF) as a combination of astute handling of the lockdown and a calibrated fiscal stimulus.
        • PFCE: It is defined as the expenditure incurred by the resident households and non-profit institutions serving households (NPISH) on final consumption of goods and services, whether made within or outside the economic territory.
  • Other Economic Indicators:
    • Domestic Consumption: Disaggregated data show that domestic consumption continued to contract, at 58.6% of GDP in Q3, as against 60.2% during the corresponding period of last fiscal.
    • Government Spending: Government spending, as reflected by the GFCE, dipped a tad to 9.8% of GDP in Q3 from 10% during Q2.
    • GVA Estimates: The growth rate in terms of gross value added (GVA) — which is GDP minus net product taxes, and reflects growth in supply — is seen contracting 6.5% in 2020-21 as against earlier estimates of 7.2% and 3.9% in the previous year.
    • GDP in Nominal Terms: It factors in inflation, and is estimated at (-) 3.8% in 2020-21.