Despite Contraction, Q2 GDP A Positive Surprise: DK Joshi, CRISIL

Despite reducing by 7.5%, India's GDP has improved than the first quarter when it had contracted by a record 23.9%.

Pent-up consumer demand and learning to live with the COVID-19 pandemic can be the reason behind India's improved GDP numbers in the second quarter than predicted according to economist DK Joshi.

In a report, the Ministry of Statistics and Program Implementation stated that the Indian economy contracted 7.5% in the second quarter of financial year 2020-21 (July - September). Despite reducing by 7.5%, India's GDP has improved than the first quarter when it had contracted by a record 23.9%.

Rating agency CRISIL, where Joshi is the chief economist, had predicted the Indian economy to shrink by 12% in the second quarter with a -9% reduction for the financial year 2020-21. In an interview with BOOM, Joshi termed reduced contraction as a 'positive surprise' and said that more upward revisions can be expected.

"Milton Friedman used to call it a plucking effect. When things go down, then just like the guitar string, they move up also very quickly. In a nutshell, I think there is a positive surprise to the second quarter GDP and this will trigger upward revisions, upgrades in GDP growth forecasts, particularly from those who were too negative or in double digits," Joshi said.

Manufacturing, which was down -39%, has increased to 0.6% and Joshi it to grow in contrast to the services sector. "This recovery is more focused on manufacturing than on services. Some people are against spending on services because they are contact-based. So, I think the funds are getting diverted either towards savings or towards the manufacturing activity. This is a trend across the board and this will continue going ahead as well," Joshi said.

Edited excerpts from the interview follow

Govindraj Ethiraj: Mr. Joshi, the contraction has definitely come down, which suggests that things are recovering. The question is how much?

DK Joshi: Well, I think as you rightly said, we are still in the contraction zone. But clearly, I think our forecast for the full year was -9% and in that, the second quarter was baked in at -12%. So, for us, I think it's a significant positive surprise. We had made our forecasts sometime in September, and the data in the recent weeks, and even for one or two months was indicating that there is a momentum which is much faster than expected. I think Milton Friedman used to call it a plucking effect. When things go down, then just like the guitar string, they move up also very quickly. Part of it, I think, is pent up demand effect and part of it is also a result of we learning to live with the virus. In a nutshell, I think there is a positive surprise to the second quarter GDP. And this will trigger upward revisions, upgrades in GDP growth forecasts, particularly from those who were too negative or in double digits.

Govindraj Ethiraj: The second quarter, Mr. Joshi, has obviously seen that recovery, but are you getting a sense that it's continuing after that?

DK Joshi: Well, October was reasonably good. And I think initial parts of November, there was some sense that the sales of automobiles etc are picking up. But I also see some flattening out happening in the data. From here on, I think the key monitorable will be whether the recovery is sustained beyond the pent-up demand that that we saw. And by the way, this recovery is more focused on the manufacturing than on services. Some people are against spending on services because they are contact-based.

So, I think the funds are getting diverted either towards savings or towards the manufacturing activity. And this is a trend across the board and will continue going ahead as well. Now the issue is if you get a second wave, which is quite strong, then I think the services part will get impacted more and manufacturing may still chug along as we have seen in other parts of the world.

Govindraj Ethiraj: The lockdown that we saw in full force in the first quarter of this year obviously resulted in manufacturing contracting sharply — it was down -39%. But the good news is that it's up by .6%. It's in the positive unlike many other sectors, except of course for agriculture. Is this a real surprise in manufacturing, or was it expected Mr. Joshi?

DK Joshi: Well, I think we were expecting manufacturing to do better than what we had expected. But a positive number was a surprise because the industrial production data which comes out every month was still intact indicating a contraction of a little more than -6%. But this is value added. So, I think the cost cuts that took place particularly in the large corporates and almost everywhere, I think they got reflected in the higher value added which is close to the margins of a company. So, the bottom line was doing better than the top line.

Govindraj Ethiraj: Trade, hotel, transport is still down -15%. And it was down -47% in the first quarter. So that's still in the negative. Now, let's come to agriculture. +3.4% in Q1 and +3.4% in Q2, what does this tell us?

DK Joshi: Well, I think agriculture is one activity, which was, in a way insulated from COVID-19. I think it was also encouraged. I think all the indicators like tractor demand, fertilizer all of them are telling you that agriculture activity remains point. What we have also seen is that swing has been pretty good, monsoons have been reasonably good, except I think some pockets where in the month of October, we saw some accessories, but that's going to show up later. Otherwise, I think agriculture is proceeding quite well. I think we might get a trend rate of growth, or maybe slightly above the trend rate of growth in agriculture this year.

Govindraj Ethiraj: If you were to look at the other two or three numbers, there's private consumption, which is now in the second quarter at -11.3%, compared to -26%, investments -7.3%, compared to -47%. But private consumption in investments in some ways give us a sense on what's coming in the future. So, it's difficult for anyone who's not a specialist to make sense of these numbers. So just tell us what your takeaway would be.

DK Joshi: Well, private consumption are the goods and services that we consume. What is surprising to me is that private consumption is falling faster than investment. I would think that it's happening the other way around. Because the government's ability to invest is impaired and private sector with capacity utilization falling, I don't think there are too many projects which are proceeding right now. So, I think that, to me, is a little bit of a surprise. And for the full year, I would expect, I think investments to do much worse than private consumption.

Private consumption will still try to normalize towards the fourth quarter of this year. It is still in the contraction mode. And I think one factor that comes in on the way of private consumption is that if you notice, inflation is also very high. And if I do a simple calculation, if food inflation goes up by one percentage point, that means that you have to spend around 33,000 crores extra on food. And food inflation is in double digits right now. So that also eats into your spending ability, particularly for the for the people who are in the lower income brackets, and where food is a larger part of your consumption basket. So, I think inflation can also be a risk to private consumption going ahead. But I would say that investment scenario is a little worse than what the numbers indicate.

Govindraj Ethiraj: 1% increase in food inflation results in 33,000 crores. That's a really frightening number. Tell us why is this food inflation so high at this point?

DK Joshi: I think food inflation is high because of because of two-three factors. One is the pulses where I think there have been some disruptions in production. And we've seen that pulses inflate much faster because there are very few avenues. You can't import them, not every country grows the pulses that we eat. So, any supply-demand mismatch very quickly reflects in high inflation. Second, I think the animal protein, which was initially shunned because people thought that COVID could spread, that is back in demand. But what has happened in between is that because the demand for poultry etc, had fallen, so there were few investments there and now we are seeing demand much more than the supply. So, supply takes a little time to catch up. So, the animal protein inflation is also very, very high right now.

But the good news is that cereals, which is your carbohydrates, which is rice wheat, etc, I think the inflation is very, very benign there. I think it's the protein part which is worrisome. And what could also be a cause of worry is the edible oils which we import from outside. We don't control their prices. So clearly, I think the food inflation has emerged as a very sticky part of overall inflation and is still in double digits.

Govindraj Ethiraj: To most normal people, the numbers may not matter. What matters is what is going to actually happen. Will jobs come back? Will we feel a sense of stability economically? And are you getting a sense that the trajectory now seems to be going back to life as it was before COVID at least economically? I know it was before COVID was not very great, either. But at least are we headed in the right direction?

DK Joshi: Yeah, I think we are moving towards that. But I think we've lost at least one and a half years. To put it mildly, with now -9% GDP growth, what it meant was that even in 2021-22, we will not have the size of the economy which was there in 2019-20. Even if there is some upside to that, the hit is quite massive. It's going to take some time to normalize because the balance sheets of the government, the balance sheets of the households, I think some of them they are getting impaired. So, I it will take a while before So, we actually fully return to normal.

Updated On: 2020-12-04T19:18:22+05:30
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