Now in recession, India is faring worse than most major economies

Searching for that spark.
Searching for that spark.
Image: REUTERS/Adnan Abidi
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The Covid-19 lockdowns between March and June hurt the Indian economy pretty badly. But even after the lockdowns were lifted, things haven’t changed for the country much as India continued to be one of the worst-hit major economies during the July-September period.

In the September quarter, India’s economy contracted by 7.5% year-on-year, pushing the country into a recession. Among the major economies of the world, only the UK and Spain shrunk sharper than India.

While the contraction in India’s economy has eased as compared to the first quarter of the financial year 2020, many sectors are still in severe distress.

India in recession

The economic downturn in September was led by the service sector with trade, hotel, and transport segments witnessing the sharpest fall. Other parts of the service industry such as finance, real estate, professional services, public administration, and defence were also in negative territory.

Besides agriculture, electricity, and manufacturing, all other sectors continued to shrink.

Surprisingly, the manufacturing sector staged a turnaround but there are concerns about whether it is sustainable in the wake of weak demand and investment.

“As the expectation was that a combination of the pent up and festive demand will play a big role in pushing the demand, (the) manufacturing sector geared up itself by building up the inventory through the months of August and September. Yet this manufacturing growth needs to be taken with a pinch of salt because it is on a low base,” warned Sunil Kumar Sinha, principal economist at India Ratings and Research.

Economists believe that India’s economy is not out of the woods yet. Factors such as the rise of Covid-19 infections, re-imposition of lockdowns in certain parts of the country, and discounting of festive demand, will give a clearer picture in upcoming quarters.

“Economic data ahead would be crucial to gauge the quantum of ‘froth’ in this Q2 data from pent up, festive, and inventory restocking demands and to also throw more light on the employment and wage situation,” said Sreejith Balasubramanian, economist at IDFC Asset Management Company. He added that cost-cutting in the second quarter by companies to improve profits and demand in major export markets will also play a big role in how India’s recovery shapes up.