Single-digit contraction expected in July IIP: ICRA

New Delhi, Sep 10 Ratings agency ICRA expects a single-digit contraction in the upcoming print for the Index of Industrial Production for July 2020.

According to the ratings agency, while the improvement in industry had gathered speed in July 2020, the momentum of the recovery in the services sector stalled that month.

Other indicators, GST e-way bills, rail freight, port cargo traffic, domestic airlines' passenger traffic, and the consumption of petrol and ATF, reported only a modest improvement in their YoY performance in July 2020, relative to June 2020.

In contrast, the YoY performance of diesel consumption, hydroelectricity generation and refinery output had worsened in that month, with a continuing surge in infections causing the re-imposition of lockdowns in some states.

As per the agency, government expenditure, a key driver of economic activity in Q1FY21, reported a volatile trend in July 2020.

It pointed out that revenue expenditure growth slipped from 40.1 per cent in June 2020 to 18.6 per cent in July 2020, while remaining substantial.

However, capital expenditure contracted by 47.1 per cent in July 2020 after having more than doubled in June 2020.

"The Indian economy is undoubtedly recovering from the lows seen in Q1 FY2021. However, the pace of the improvement in Q2FY21 is fragmented, with a sharper momentum in industry relative to services, amid a continuing healthy outlook for agriculture," ICRA's Principal Economist Aditi Nayar.

"In our view, the contraction in GDP will narrow considerably to 11-13 per cent in Q2FY21, from 23.9 per cent in Q1 FY2021. While some indicators of the industrial sector displayed a sharp year-on-year (YoY) improvement in July 2020, relative to June 2020, especially automobile output and non-oil merchandise exports, the core sector displayed a muted recovery."

Besides, ICRA pointed out that available indicators for August 2020 have provided mixed cues, with a sharp improvement in coal and rail freight, juxtaposed with dips in electricity generation and diesel consumption.

Furthermore, ICRA said that GDP data for Q1FY21 largely in line with the rating agency's forecast, and the varied recovery building up in Q2 FY2021.

Consequently, it maintained projection of a 9.5 per cent contraction in India's GDP in FY21.

"The evolving situation remains consistent with our forecast of a 9.5 per cent contraction in economic activity at constant prices in FY21," Nayar said.

"Nevertheless, the unabated rise in Covid-19 infections in India, even at the tail-end of Q2FY21, and the health and economic challenges it continues to pose, remain a risk clouding the outlook."

( With inputs from IANS )