Recovery aided by pent-up demand, govt, realty; data inadequate; no proof yet of sustained revival
India’s economy regained quite a lot of lost steam in the December quarter, to register a flat growth of 0.4% after two consecutive quarters of deep contraction caused by the pandemic, but might slip a bit in the current quarter, according to the data released by the National Statistical Office (NSO) on Friday. In the financial year 2020-21, the gross domestic product (GDP) would contract by 8%, the sharpest drop in recorded history, as per the second advance estimate; the contraction was previously seen at 7.7%.
A pick-up in private consumption, largely driven by release of pent-up demand by affluent households and sections of the middle class, government investments, solid performance by the agriculture sector and revival of manufacturing, construction, banking and real estate activities aided the recovery from the abyss (see chart). The recovery is, however, still not broad-based. Also, its sustainability is not proven beyond doubt, although a very favourable base would boost the numbers in Q1 and Q2 of the next financial year.
Of course, NSO, which has faced graver data challenges due to the pandemic, resorted in a more than usual degree to extrapolations to compute the GDP, and admitted that the latest set of numbers were therefore likely to undergo sharp revisions in due course (the NSO has already revised GDP growth rates for Q1 and Q2, both released after the onset of the pandemic, to -24.4% and -7.3%, respectively, from -23.9% and -7.5% estimated earlier).
It is also being noted that since the NSO relied on the financial performance of large listed companies, which have cornered market share from the smaller firms in recent months, to gauge the gross value added (GVA) by industry, its conclusions could be less reflective of the grimmer realities in the SME sector, among small traders and in the informal sector. At the broader level, the economic activities are lingering below the Pre-Covid level.
The second advance estimate for FY21 indicates an improvement in GVA growth to 2.5% in the fourth quarter. But it projected the GDP to slip back into a 1.1% contraction in the March quarter, due to back-ended release of subsidies by the government.
Given that demand is still somewhat muted and the pricing power gained by large companies may not be all that sustainable, government expenditure has to be stepped to achieve the estimated growth rate in Q4. In recent months, the Centre has indeed stepped up spending to support the economy and also successfully roped in CPSEs in the venture, but the revenue-starved state governments have been forced to slow their capex.
The central government’s budget capex grew a steep 335% on year in January, up from 63% December and 249% in November; its overall budget spending grew 49% in January, versus 29% in December and 48% in November.
In fact, if the Centre were to meet the revised budgetary expenditure estimate (RE) for FY21, it would have to more than double the spend in Q4 from the year-ago level. A good part of this extra spending would propel growth, although large lumpy items like clearance of fertiliser subsidy arrears to industry and release of dues to FCI would have only minimal impact.
Private final consumption expenditure, the largest pillar of the economy, suffered a much lower contraction (-2.4%) in Q3FY21 compared with -11.3% in Q2 and -26.3% in Q1, enabling it to up its share in GDP to 60.2% in Q3 from 56.7% in Q1. Gross fixed capital formation also improved from -46.4% growth in Q1 to -6.8% in Q2 and, further, to 2.6% in Q3, reflecting government capex, rather than private investments.
As far as the immediate prospects are concerned, the finance ministry earlier this month said high-frequency indicators, including power consumption, inter-and-intra-state mobility, manufacturing capacity utilisation, business expectations and consumer confidence, in January point at a “sustained and strengthening economic recovery”. Manufacturing PMI hit a three-month high in January, while services PMI rose to 52.8 last month from 52.3 in December, staying above the 50-level mark that separates growth from contraction for a fourth straight month.Merchandise exports rose 6.2% in January from a year before, the highest in 22 months and compared with a 0.1% rise in December, signalling a nascent recovery following the Covid shocks.
However, the output of eight infrastructures, with a near 40% share in the index of industrial production, remains subdued. In fact, after a 0.6% rise in September, it slid at a faster pace of 0.9% in October and 2.6% in November before inching up marginally by 0.2% in December and 0.1% in January.
Icra principal economist Aditi Nayar said: “Various lead indicators have recorded a loss of momentum so far in the fourth quarter, in contrast to the improvement in sentiment brought on by the vaccine rollout. We expect consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self-employed.”
Nominal GDP on which key budget numbers are benchmarked, is estimated to contract by 3.8% in FY21, against a 4.2% fall estimated earlier. This will reduce FY21 fiscal deficit marginally from 9.5% (as per the revised Budget estimate) to 9.4%.
With the easing of external headwinds, exports have begun to recover, so have imports. So, the pulldown impact of net exports could exacerbate again in Q4, with a stronger rebound in imports, as domestic demand is showing signs of a revival. The share of exports in GDP (in real term) is expected to remain unchanged at 19.4% in FY21.
Reacting to the GDP data, the finance ministry said the growth in Q3 reflects “further strengthening of V-shaped recovery” that began in Q2. The resurgence of the gross fixed capital formation was also triggered by strong capex by the Centre. The fiscal multipliers associated with capex are at least 3-4 times larger than government final consumption expenditure, it said.
Kunal Kundu, India economist at Societe Generale, said a pick-up in investment enabled the economy to record a marginally positive growth, as did a lower trade deficit on account of less-than-robust economic activity. “Going forward, we believe that investment and not consumption will be India’s growth driver,” he said.