Expect Q2 GDP to show bounce back but concern really on sustaining it as challenges abound

Numbers still play a crucial role in judging the performance of an economy and while we are well into the third quarter of the current financial year, we have only the first quarter GDP numbers – between April and June – to fall back on so far.

As per CMIE, there has been an actual decline in the labour participation rate percentage from 40.34 in this January to April period to 40.22 in the May to August timeframe this year.

The temptations of hope are running high for some good set of numbers for India’s second quarter Gross Domestic Product (GDP) numbers due for release on Tuesday, November 30th by the National Statistical Office.

Numbers still play a crucial role in judging the performance of an economy and while we are well into the third quarter of the current financial year, we have only the first quarter GDP numbers – between April and June – to fall back on so far. At the moment, the only data points that all are looking to are the high frequency indicators, including electricity consumption, tax collections and those produced by the private sector to assess the economic recovery. But then, as we come to nearly conclude the third quarter, a lot of supply disrupting, input-price increasing, new virus variant-laden water has flowed under the bridge, causing new worries on the ability to sustain any growth momentum.

As this is being written, there are concerns all around on the new covid-19 virus variant. Named Omicron – the fifteenth letter of the Greek alphabet and categorized by the World Health Organisation (WHO) as a “variant of concern,” subject experts need a few weeks before they can get to answer some of the prickly questions being raised around its virulence and transmissibility. Or the key question whether it can get to supplant the dreaded delta variant? But before this, the third quarter of the current year has already seen companies talk of supply chain disruptions and rise in input prices, which is likely to show in the third quarter numbers, both for the economy and for the corporate sector.

Profitability & Cost-cutting

But look around and many of the large companies seem to have shown higher profitability even if some have not been able to see a proportionate increase in the turnovers. Ask Naushad Forbes, co-chairman, Forbes Marshall and the former president of the Confederation of Industry (CII) on what perhaps could explain this and he says, large corporations have become extremely profitable without a concomitant increase in turnovers because many large companies looked at costs closely and cut these significantly. Unfortunately, he says, some of it came in terms of labour lost but then some of it came back but rest was overhead expenses and were about cutting other costs. “Some of it was healthy cost cutting and showed in improved corporate profitability. I do not know if it is true this year as almost every company is reporting lot of pressure on raw material cost and increases in shipping costs with no end in sight. So, while thus far,” he says, “profitability improved, I think we will see a shrinkage in the gross margin results of some of the companies in the second quarter, especially in manufacturing companies where there is a raw material cost. Or engineering and auto companies that have high material cost as a percentage of sales.”

GDP: What Q2 can tell about the year?

Dr C Rangarajan, economist and the former governor of the Reserve Bank of India (RBI), admirably clear always about wanting to bank his views on actual numbers, says, “today, we have to go largely by the high frequency indicators and they do seem to indicate a recovery in the economic system. But how strong will this become clear with the second quarter GDP number. He expects it to be “reasonably strong because in the second quarter of last year, it was a shinkage of over 7 per cent.” If the second quarter GDP number, he says, is a growth of 15 per cent then the overall growth for this year can be about 9.5 GDP.”

Can the bounce back be sustained?

Naushad Forbes also agrees on the need for likelihood of such numbers and does see reasons to believe that there will be a bounce back this year though his concern is really about growth rates next year and about sustaining the growth momentum. “Will we,” he asks, “get back to growth rate of 7 to 8 per cent as we saw in the mid-2000s? And, whether we will get back to that kind of growth rate next year onwards because,” he feels, “that has to be the goal and I will not take it for granted that we will.”

My reading of the current numbers, he explains, “is that what we will get back to next year onwards will be where we were before the pandemic hit us, which was more of a GDP that was in the 4 to 5 per cent range and I would love to be proven wrong here.”

This year’s number will be fine, he says, and is confident that “we will see a bounce back and recovery from last year but in absolute terms we will end March 2022 broadly at the same point at which we were in March 2020, which also means we have lost two years and have to get that back. To recover the lost ground we need to double the rate of growth.”

He asks for instance: Do we expect H1 (the first half of the current year) to compare with H1 of last year or compare Q2 this year with Q2 of last year. If H1 has to recover then the Q2 number will have to be quite solid and upwards of 15 per cent and perhaps in the region of 20 per cent if we need to be back to H1 of 2019-20. But then, he refers to the numbers from the Centre for Monitoring Indian Economy (CMIE) and sees concerns still around the labour participation rate though the expectations at the moment are that there could be pick up following the festive season but still there are questions around how sustainable can these be.

As per CMIE, there has been an actual decline in the labour participation rate percentage from 40.34 in this January to April period to 40.22 in the May to August timeframe this year. Which, economists point out means we are talking of a scenario of falling labour participation rate with higher unemployment rate. The unemployment rate (30 day moving average), according to the CMIE, is 7.04 per cent as on November 27th 2021 as against 6.52 per cent in January this year. But then, what about the high frequency indicators, which all find showing a recovery trend?

Hopes up with the rise in September

But then, there was an apparent glimmer of hope when the CMIE reported findings in October. Labour market data from CMIE’s Consumer Pyramids Household Survey showed a dramatic all-round improvement in September 2021. “Jobs increased by 8.5 million during the month. The unemployment rate declined from 8.3 per cent in August to 6.9 per cent in September. The labour participation rate increased from 40.5 per cent to 40.7 per cent and most importantly, the employment rate inched up from 37.2 per cent to 37.9 per cent.” A highlight of the increase in employment in September 2021, according to the CMIE, was the increase in salaried jobs. These increased by 6.9 million from 77.1 million in August to 84.1 million in September. Of all the major occupation groups, salaried jobs saw the biggest increase. This big jump in September brings salaried jobs the closest to their average in 2019-20, which was 86.7 million.

What followed this has been the festive season and the expectations are that it will all get reflected in the third quarter GDP numbers. Also, according to the CMIE, the recent increase in vaccination and drop in infections are reasons to remain optimistic. The same factors could also help employment in some others sectors to improve. But, quoting its managing director and CEO Mahesh Vyas, reminds “beyond these low hanging fruits any further increase in employment would need investments into creation of new capacities.”

Hiring momentum

Rituparna Chakraborty, co-founder and executive vice president, Teamlease Services, says, “if you compare quarter on quarter then there is a definite improvement in the hiring momentum across segments. Obviously, there are some segments which are doing better than the others but the good thing about the current situation is that there is no sector that is not thinking about reinitiating hiring.”

What is important, she says, is that the hiring momentum has been picking up. “India has never had a track record of bridging the gap between those who need employment and have employment. So, it is not as if in the past everyone who wanted a job got the job or got the job they wanted. We have to therefore focus on incremental progress and the ground that is being covered every month.”

Demand recovery

But then, Biswajit Dhar, professor of economics at the Jawaharlal Nehru University (JNU) says much depends on being able to sustain growth and “sustaining growth hinges on the demand recovery which in turn is today dependent on the improvement in the labour market conditions. Secondly, given the input costs that are increasing and there is a relatively high inflation and given that typically inflation sucks out demand from the market, the conditions do seem more adverse than conducive for high growth.”

Shrinking Informal sector

Those who believe in the no-looking back and a journehy now to a sustained recovery often talk of the formalisation of Indian economy. The SBI Research in its publication ‘Ecowrap’ on November 1, 2021, says the share of informal economy may have shrunk to no more than 20 per cent from 52 per cent in FY 2018. But some economists do seem to see challenges. Professor Dhar for instance, points out that the not only does the report not define “informal economy” but digitisation of the economy, introduction of Goods and Services Tax (GST) and increased use of Kisan Credit Card are all at best steps towards reducing the shadow economy. Professor M S Sriram, faculty member, Centre for public policy at the Indian Institute of Management (IIM), Bangalore, in a recent column in Financial Express Online, pointed out that one way of formalisation is forcing existing informal sector to enter the formal sector by mandatory registration. The other way is by expanding the large formal sector and by moving downward & deeper to compete with what was exclusively informal sector in the past. This accelerated formalisation, he says, gives a false sense of fulfilment, not backed by growth of natural formalisation.

For the moment, all rests on what the next set of data emerges from the government on November 30th.

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