India’s gross domestic product (GDP) for the second quarter (July to September 2020-2021) has shown a contraction of 7.5%. This, on top of an unprecedented 23.9% contraction in the first quarter, puts India technically in recession. But then, economists and those within the industry see reasons for hope despite some uncertainties around factors that could drive the remaining two quarters. And they are cautiously optimistic.

Rajiv Kumar, economist and vice chairman, Niti Aayog, sees the growth posted by the manufacturing sector as the most encouraging news. Speaking to Fortune India, he says, “From a huge decline earlier, there is now a 0.6% growth [in manufacturing] year-on-year, which is a very pleasant surprise and shows that despite the fact that the core industry has shown a decline, in the consumer goods industry demand has really gone up and that is most remarkable.”

He also finds the positive growth of 4.4% in electricity, gas, water and other utility services as the other hard-to-miss highlight.

Economist and former governor of the Reserve Bank of India C. Rangarajan, however, feels what is important to look at is what these numbers indicate for the year as a whole. “I think the numbers as they are coming out now do indicate that for a year as a whole the contraction may be around 7% to 8 % rather than the contraction of around 10 % which was being talked about earlier even by some international agencies.” To him, the big positive message from the numbers “is the very fact that the contraction is substantially lower than that in the first quarter,” which, he says, effectively means that the economy is trying to come back to normal levels.

The 7%-8% contraction for the year as a whole, he says, is based on the expectation that the output in the third and fourth quarter will be slightly better than in the previous year. Agriculture, he says, will continue to see improvement and show positive growth in the third and the fourth quarters and “if manufacturing begins to show a positive growth then overall, the output in the third and the fourth quarter will not only be just equal to what it was last year but be slightly positive in these quarters,” he says.

While one could hope to see positive growth, albeit of a low order, in the third and fourth quarters, it may not be strong enough to compensate for the loss in the first two quarters and therefore overall, there is still likely to be a contraction of 7%-8 % for the year 2020-21.

Ajay Pandey, professor of finance and accounting at the Indian Institute of Management, Ahmedabad (IIMA), also feels “the 7.5% contraction in the second quarter is a significant improvement over the first quarter, which was impacted by lockdown.” But then, he cautions that “the 7.5% contraction still does not give a sense of how quickly we will move into positive growth territory in the third and fourth quarters.” This, he feels, is partly because “while there are some early indicators like the growth in manufacturing, we need to clearly look at the factors that have driven this and to what extent it is on account of depletion in inventory or on account of pent-up demand.” Much of it, he feels, is hard to conclude based on the numbers of a single quarter alone. Therefore, for the year as a whole, he sees the best case scenario could be an 8% contraction and in the worst case a negative of around 10%.

Those within the industry display a cautious but optimistic stance. Kiran Mazumdar-Shaw, chairperson of Biocon, says, “As we move from a surging pandemic to a receding one, I think we will see a very strong resilient growth and by the end of this fiscal year, we will see growth coming back.”

Conscious of the fact that the economy is in recession, she pins her hopes on a vaccine and some incentives for investors, coupled with some regulatory reforms to back them. “We are in recession but I think we will bounce back quite fast because we will see a vaccine next year.” Though, she says, “the numbers suggest, we are still not out of the woods and we are also still living in a strong Covid-19 world, if these signs of improvement are coupled with any investment enablers such as, say, a rejig of the GST rates, growth will return. I am very optimistic that once the pandemic ends, the growth will be much more robust as people would want to rebound and catch up on lost time.”

Siddhartha Sanyal, chief economist and head–research, Bandhan Bank, points out that “the actual number beat our expectation of a 10% year-on-year contraction.” However, he says, “it might be prudent to maintain caution as regards the pace of recovery in the coming months.” The upside surprise in Q2, to him, is not suggestive of a “commensurate uptick in growth during the second half of FY21. A somewhat more uneven pace of recovery remains our baseline expectation for the remaining months of the current fiscal.” He says “factors such as uneven festive sales momentum, inventory position with dealers in various industries and packaging industry demand support that view.”

“Given the uncertainties around investments and exports and limited government spending headroom, recovery prospects currently hinge critically on uptick in private consumption. However, barring a quick turnaround from its current unprecedented lows, the weak consumer confidence in urban areas act as a headwind at the moment,” he points out. However, he does add: “It is logical to expect a strong rebound in GDP during FY 21-22, likely in high single digits, partly reflecting a markedly favourable base.”

Shape of the recovery

On the shape of the recovery curve, whether it will be a V-shaped recovery that the officials within the government often talk about, Rangarajan says, “it is a pick up from the around 23% contraction in the first quarter, but whether it will be a V-shaped recovery after we reach the output numbers of last year is what needs to be watched now because that depends a lot on several factors. As of now, he says, “it will be V-shaped till we reach the level of last year.”

After that, he says, much will depend on several other factors. “These would include the scale of government expenditure and the overall economic outlook, the investment climate, investment attitude, the level of savings and so on, and all of that is yet unknown,” he says.

But then, it is not as if there are no worries at the moment. Rangarajan says, he is a little concerned about the decline in expenditures on public administration, defence, and other services. This has shown a contraction of 12.2%. He sees the assumptions around a positive growth in the third and fourth quarters also linked to a pick-up in government expenditure.

However, Rajiv Kumar sees the 12.2% contraction as a sign of the government’s focus of maintaining fiscal balance and to conserve some fiscal space for future stimulus, if needed. On the point that by definition, the economy is now in recession, he feels that since these are not normal times, therefore a focus on the recovery is what really matters.

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