India’s GDP crashes to -23.9% in Q1- FY21 due to COVID-19; worst contraction till date

In a devastating development, India’s GDP for the first quarter of FY 21 stood at -23.9% as per data released by the National Statistical Office (NSO) on Monday, making it the worst contraction on record. In May, amid the nation-wide COVID-19 lockdown, India’s GDP growth for the January-March quarter (Q4) 2019-20 stood at 3.1%. Overall FY 19-20 GDP stood at 4.2%, hitting an 11-year low. India, currently has extended its lockdown in containment zones till September 30, freeing up most restrictions.

India’s GDP crashes to -23.9% for Q1

As per market reports, core sectors’ growth stood at – Industries at -381%, Services at -20.6%, Manufacturing at -39.3 %, Trade, Hotels at -47. Agriculture has been the only sector to see growth clocking a 3.4% increase, due to rural sector remaining mostly free from lockdown. CRISIL had predicted that India’s fourth recession since independence, the first since liberalisation and perhaps the worst to date, is here.

Economy to shrink, Inflation to rise

On August 6 , RBI Governor Shaktikanta Das decided to keep the repo rate unchanged at 4 percent, stating  for the year 2020-21 as a whole, real GDP growth is also estimated to be negative. The RBI governor further said inflation is expected to be at elevated levels during the second quarter, however, may ease in the second half of the current fiscal year. He said that supply chain disruptions persist, resulting in inflation pressures across segments. Pinning hope on the agriculture sector, he said, Kharif crop harvest is expected to boost rural demand.

Moreover, amid falling growth, at the 41st GST Council meeting, the Centre refused to pay mandatory GST compensation of 14% for the current year due to COVID-19 pandemic.  Finance Minister Nirmala Sitharaman stated that the economy is facing an extraordinary ‘Act of God’ situation, which may result in economic contraction. It also gave states two options, which has not been accepted by most states, who are also seeing economic contractions.

To alleviate state’s GST stress, Revenue Secretary Ajay Bhushan Pandey said a special window can be provided to the states at a reasonable interest rate for the borrowing of Rs 97,000 crore – the amount can be repaid after five years (of GST implementation) ending 2022 from cess collection.

The second option before the states is to borrow the entire Rs 2.35 lakh crore shortfall under the special window. “States have been given seven days’ time to think over the proposal,” Pandey said.