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The Indian economy contracted 7.5% in the July-September quarter of FY 21. However, the contraction is much lower than that of the first quarter, where India's GDP fell 23.9% in the first ever economic decline. This de-growth in the second quarter now confirms that India has officially entered what is a 'technical recession'  in economic parlance to indicate that an economy has faced two successive quarters of decline.

India’s economic deceleration has continued despite improvement in macro fundamentals. Granted, but looking from a different angle the figure would suggest that India's economy has recovered significantly from the worst it faced in the previous quarter. Even otherwise, the rate of decline in GDP in the second quarter is lower than what most rating agencies and investment banks, including RBI predicted earlier.

And if all the sectors of the economy, except agriculture and farming, manufacturing and electricity, which grew at 3.4%, 0.6% and 4.4% respectively, posted a decline, the rate of deceleration has moderated substantially in Q2 compared to Q1.

The sector-wise performance shows an improvement over last quarter that captured the full effect of the nationwide lockdown. In the previous quarter, agriculture was the only sector that grew 3.4%. Construction declined over 50.3% and trade, hotels and transport over 47%. And now in Q2 the gross value added (GVA) of construction in the second quarter has contracted 8.6% while that of trade, hotels and transport has contracted 15.6%.

The performance of manufacturing in Q2 came as a surprise. The sector recorded a positive growth of 0.6% as compared to a huge 39.3% contraction in Q1. Experts believe that it was primarily because of the boost in the consumer businesses spending in the run-up to the October-November festive season. The expected surge in demand had earlier made manufacturers to raise production in the second quarter.

Reacting to Q2 GDP figure the chief Economic Adviser K V Subramanian has said there is an "upside potential" in the estimates about the economy during the current financial year as recovery is taking faster than expected. Subramanian has also talked of higher government spending to support the revival trend.

But this seems a difficult task due to the lockdown of the economic activities the government’s tax collections have suffered. Net tax receipts between April and October 2020 were estimated at Rs 5.76 trillion -- down 15.7% from a year ago, while total expenditure was Rs16.6 trillion during this period. The fiscal deficit in the seven months to end-October stood at Rs 9.53 trillion or 126.7% of the budgeted target for the whole fiscal year suggesting the government’s tight fiscal condition. Fiscal deficit as percentage of GDP predicted to exceed 8% of GDP in FY 21 against 3.5% targeted. This is reflected in the sharp decline in government’s final consumption expenditure – down to 10.9% of GDP in the second quarter of the current year compared to 18.1% in the first quarter.

Maybe, the better than predicted performance in the Q2 has raised hope for a positive GDP growth soon, but what must be bothering policy makers is that the  critical employment generating sectors like construction, mining and services are continuing to stay weak.

And despite better numbers, India is feared to witness an economic contraction in 2020 - 2021. Though there is unanimity across rating agencies and investment banks that economic contraction will occur in FY21, the quantum of this contraction varies. The RBI has estimated 9.5% decline for FY21 during its October monetary policy announcement, the International Monetary Fund estimates a 10.3% fall and the World Bank a 9.6% contraction.