NSO pegs GDP contraction at 7.7 per cent. Stronger rebound in economic activity, vaccine rollout, may mean faster pick-up

The first advance estimates of national income for the current financial year, released by the National Statistical Office on Thursday, indicate that the Indian economy is likely to contract by 7.7 per cent in 2020-21. This is in line with the RBI’s estimate, which, in December last year, had pegged the decline at 7.5 per cent. Considering that the economy contracted by 15.7 per cent in the first half of the year, these numbers suggest that the NSO believes that in the second half of the year, the economy would be at almost the same level as it was last year. In nominal terms — this assumes significance as it will form the basis of the upcoming budget numbers — the contraction is pegged to be smaller at 4.2 per cent, with the size of the economy estimated to be Rs 194.81 lakh crore in 2020-21, as against Rs 203.89 lakh crore in 2019-20.

On the production side, the pace of recovery is likely to remain uneven. While agriculture is expected to continue to grow at a healthy pace, not much of an uptick is expected in the manufacturing sector. The construction sector is expected to pick up faster, growing at 4.4 per cent in the second half of the year, after contracting by almost 30 per cent in the first half. On the services side, the badly scarred trade, hotels, transport and communications sector is likely to continue to contract in the second half of the year as well, though the pace of decline is expected to ease marginally. However, both financial, real estate and professional services and public administration, defence and other services are expected to impart a positive impulse to the economy in the second half. The latter is projected to grow at 3.3 per cent, after contracting by 11.3 per cent in the first half. The sharp rise in central government spending in November is indicative of this. On the expenditure side, in the second half of the year, the NSO expects both household demand and investment activity to recover to almost the same level as last year.

As these estimates take into consideration data for only seven to eight months of the year, these numbers are likely to be revised in the months ahead. With the momentum observed in various economic indicators appearing to grow stronger in the period thereafter, and a rollout of the vaccine likely to provide a fillip to economic activity, especially high-contact services, growth in the fourth quarter may well be stronger than what is being expected.

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