The surprise resilience shown by the manufacturing sector that restricted GDP contraction to only 7.5 per cent in the September quarter could be a result of massive purge in costs such as employee cost by corporate houses and businesses, which could turn a potential headwind in the future, economists at SBI wrote on Saturday.

India’s July-September (Q2 of 2020-21 fiscal) GDP growth showed surprising resilience with a contraction of only 7.5 per cent in real terms, while the market consensus was higher, Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, wrote in Ecowrap.

With the improvement in manufacturing because of the lifting of lockdown measures, GDP contraction has slowed down significantly. The agriculture sector continued to perform well with growth at 3.4 per cent. Services remained in the negative territory, although the decline was contained as trade, hotels, transport, communication and services related to broadcasting showed recovery.

“The most astonishing number is the positive growth in manufacturing in Q2. Despite being the worst affected sector in Q1 (due to lockdown), it is quite puzzling how manufacturing turned itself around,” he wrote in the Ecowrap issue.

“We believe one possible reason for this could be stellar corporate GVA numbers in Q2 on the back of a massive purge in costs. Further, small companies, with a turnover of up to Rs 500 crore, are more aggressive in cutting cost, displaying reduction in employee cost by 10-12 per cent,” Ecowrap said. This, it said, could turn a potential headwind in future in terms of a drag on consumption.