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 India's GDP is expected to record a year-on-year rise of 0.7 per cent in Q3FY21, thereby ending the recession created by the nationwide lockdown imposed last year to curb the spread of Covid-19, rating agaency ICRA said on Tuesday.

The forecast shows a turnaround from the 7.5 per cent contraction in Q2FY21, benefitting from a pickup in private consumption and government spending. Besides, the mild forecasted growth in Q3FY21 signifies that the economy has exited the Covid-19 pandemic-induced recession after two quarters.

ICRA expects the gross value added (GVA) at basic prices to have risen by 0.7 per cent in Q3FY21, in contrast to the 7 per cent contraction in Q2FY21.

According to ICRA's Principal Economist Aditi Nayar: "Encouragingly, almost all the non-agricultural lead indicators that we track, recorded a continued, albeit uneven, improvement in volume terms in Q3 FY2021. This pickup benefitted from the continued unlocking of the economy, uptick in consumption during the festive season, as well as higher Central government spending. Moreover, most of the tracked indicators rebounded to a growth on a YoY basis in that quarter, although this was on the low base of Q3 FY2020."

But sectors such as aviation continued to contract in Q3 FY2021.

ICRA noted that the Index of Industrial Production recorded a sedate 1 per cent rise in the just-concluded quarter while rising raw material prices contributed to lower margins in some sectors.

However, the profitability for a large portion of the formal listed space remained healthy, benefitting from the cost-cutting measures that had been undertaken at the peak of the pandemic as well as rising volumes.

"In our assessment, the formal part of the Indian economy has shrugged off the pandemic blues and is gaining traction at the cost of the smaller and less formal segment. This is hastening the process of the formalisation of the economy and contributing to a consolidation in favour of the larger and more reputed players in certain sectors.

"While the informal and contact-intensive sectors will certainly heal more gradually, the lack of adequate proxies constrains a deeper analysis of the state of their recovery," the rating agency said.

On a sobering note, the January 2021 round of RBI's Consumer Confidence Survey of respondents in 13 major cities indicated only a modest pickup in consumer sentiments.

In contrast, healthy kharif output and crop procurement continued to buoy rural farm sentiment.

Moreover, the migration of labour back to urban areas is expected to have restarted remittances and added to the consumption of the non-farm part of the rural economy.

"ICRA expects that the revival in Central Government spending supported the Indian economy's exit from the recession in Q3 FY2021," Nayar said.

Further, the government of India's capital expenditure and net lending increased by a significant 117.7 per cent in Q3 FY2021, in contrast to the contraction of 39.1 per cent in Q2 FY2021.