Covid-19 strikes bigger blow to services

That the fourth-quarter (Q4) gross domestic product (GDP) growth would plunge more than previously expected was a given. Hard data on industrial production, exports, auto sales and freight transport, among others, had hinted the hit from global slowdown and just a week of domestic lockdown in March had caused much pain.

The fourth quarter and full-year provisional estimates for fiscal 2020 brought more clarity on the extent of this pain. GDP in the fourth quarter grew 3.1% compared with 4.1% in the third quarter. The fiscal 2020 growth estimate is now 4.2% compared with 6.1% in fiscal 2019.

CRISIL sees the Indian economy contracting 5% in fiscal 2021. While we expect non-agricultural GDP to de-grow 6%, agriculture could cushion the blow by growing at 2.5%. This is premised on the following: an extension of restrictions and lockdown, especially in states where Covid-19 cases are still rising; a normal monsoon that supports the kharif crop and agriculture incomes; softer crude oil prices; and, limited fiscal support to prop up an immediate growth revival. Overall, risks remain tilted to the downside and hinge on further extension in containment measures, slipping of global growth and a sub-normal monsoon. Our recent report, Minus five, details these assumptions and risks.

The latest GDP release by the National Statistical Office (NSO) highlights three key trends:

• Services suffering more than industry. For Q4 of fiscal 2020, services sector growth slipped to 4.4% from 5.7% in the third quarter (Q3). The hardest hit were trade, hotels, transport, communication and storage – sectors that would have come to a near standstill due to the lockdown. These sectors are set to sink deeper in the first quarter (Q1) of fiscal 2021.
  
  The industrial sector contracted for the second consecutive quarter led by a sharp fall in manufacturing activity. The impact was, however, cushioned somewhat by the strong performance of electricity and mining. The bigger blow to manufacturing in Q4 is possibly because of the dip in merchandise exports. A rough classification using IIP manufacturing data as proxy for the quarter, suggests a sharper fall in output of labour-intensive sectors relative to capital-intensive sectors suggesting. This raises worry on the job front.
• Farm to the rescue. Robust agriculture growth played a huge role is cushioning growth in Q4. The sector – which is also expected to do well in fiscal 2021 – grew 5.9% which is the highest growth in eight quarters. If not for the outperformance of this sector, overall gross value added (GVA) growth would have plunged deeper. GVA grew 3% in Q4 compared with 3.5% in Q3. Excluding agriculture, GVA growth is down to 2.5% from 3.4% in Q3.
  
• Bigger role for government. The heft of the government in driving growth was seen in Q4 data as well. Government consumption spending saw a double-digit growth for the third consecutive quarter. We believe this will continue in fiscal 2021 as fiscal spending on stimulus measures gathers speed. The role of private sector in supporting growth will stay weak. In Q4, private consumption growth at 2.7% was the slowed in 21 quarters while fixed investments contracted for the third consecutive quarter.