Economy likely contracted 12% in Q1: Report

Lockdowns imposed by the states in April and May to contain the second wave of the deadly COVID-19 pandemic has likely led to the economy contracting 12 per cent in the June quarter as against 23.9 per cent contraction in the same quarter in 2020, says a brokerage report.

The economy had its worst contraction on record in FY21 at 7.3 per cent as the 2.5 months of unplanned lockdown announced by the centre with just a four-hour notice had crippled the economy in the first quarter with a massive 23.9 per cent contraction, which improved to -17.5 per cent in the second quarter.

But the economy showed a sharp V-shaped recovery from the second half when it posted a 40 bps positive growth and in Q4 clipping at 1.6 per cent, containing the overall contraction at 7.3 per cent for the year.

This 12 percentage point contraction will have the economy missing a sharp V-shaped recovery this time around, unlike seen last year after the national lockdown was lifted, as consumer sentiment remains very weak this time around as people are more worried about the pandemic than last year, says Swiss brokerage UBS Securities India.

Quoting in-house data from UBS-India activity indicator, Tanvee Gupta Jain, the economist at the Swiss brokerage, says the indicator suggests that economic activity has contracted an average of 12 per cent in the June 2021 quarter as against 23.9 per cent in June 2020 quarter.

This is despite the indicator rebounded to 88.7 in the week to June 13, up 3 per cent week-on-week after many states eased localised mobility restrictions from the last week of May.

Though the brokerage expects a sequential pick-up in economic activity from June, it believes that the economy may gain traction only from the second half.

Unlike the V-shaped recovery in 2020, we expect the economy to have only a gradual recovery this time, as consumer sentiment remains weak on pandemic-related uncertainties.

That said, we expect economic recovery to gain momentum from H2 as we see vaccination ramp up and the resultant control of the pandemic lifting consumer and business confidence from them, she said.

The lockdown in the second wave lasted for slightly more than a month as against 2.5 months in the first wave and industrial/construction activities were allowed at a limited scale this time.

We still expect only a sequential pick-up in economic activity from June and not a V-shaped recovery as in 2020, she added.

Significantly, there is positive momentum on the ground on the vaccination front which has improved to 3.2 million doses daily in the week to June 13 from 2.5 million as of end-May.