GDP grows 20% in Q1, but still below FY20 levels

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September 01, 2021 4:45 AM

Manufacturing, construction, electricity and mining grew fast enough in the June quarter to offset the steep declines in the year-ago quarter, while key services sectors could not even completely reverse the decline. Private consumption, the biggest constituent of the economy remained 12% below the pre-pandemic level.

Fixed investment, on which the government would make bets on, rose by a sharp 55.3% in Q1FY22 to raise its share in GDP by over 7 percentage points to 31.6%.Fixed investment, on which the government would make bets on, rose by a sharp 55.3% in Q1FY22 to raise its share in GDP by over 7 percentage points to 31.6%.

India’s gross domestic product (GDP) grew 20.1% in the June quarter from a year before, giving the illusion of a sharp economic recovery, but it was largely driven by a deeply-contracted (-24.4%) base. In absolute term, real GDP still trailed the pre-pandemic (June quarter in FY20) level by 9.2%, as the resurgence of Covid-19 infections hobbled the economy’s gradual return to normalcy, of which there was some evidence in the March quarter.

Manufacturing, construction, electricity and mining grew fast enough in the June quarter to offset the steep declines in the year-ago quarter, while key services sectors could not even completely reverse the decline. Private consumption, the biggest constituent of the economy remained 12% below the pre-pandemic level.

Fixed investment, on which the government would make bets on, rose by a sharp 55.3% in Q1FY22 to raise its share in GDP by over 7 percentage points to 31.6%. The absolute size of fixed investment was, however, still below the FY20 level.

Front-loading of capital expenditure by the Centre, states and CPSEs contributed to the jump in fixed investment, rather than the private investments that have been in the doldrums for quite long. Data gathered by FE of 15 major states showed that their combined capex in April-June was up 135% on year; the Centre’s budgetary capital expenditure also grew by 26.3% on year in the quarter.

Private consumption grew just 19.3% in June quarter on a very low base (-26.2%), reflecting the damage caused by income losses in the wake of the second wave and the shattered consumer sentiments. Once the conducive base effect wanes substantially in the current quarter, the resilience of the two principal pillars of the economy – consumption and investment – will be severely tested.

Government consumption, the usual saviour in times of crisis, was sluggish during the quarter – it declined by 4.8% on a strong base (12.7%) — as the Centre and many states reined in revenue spending.

Commenting on the GDP data, chief economic adviser Krishnamurthy V Subramanian said it “reaffirms the government’s prediction of an imminent V-shaped recovery”. “Industry witnessed a sharp rebound, followed by services, while agriculture exhibited consistent performance. Going forward, the country is poised for stronger growth, thanks to a raft of factors already initiated. These include structural reforms enabling efficiency and productivity, capex push, financial sector clean-up and vaccination drive,” he said.

Given the surge in indirect tax mop-up and limited subsidy payout, growth in real GDP remained substantially higher than the 18.8% expansion in gross value added (GVA) in the first quarter. Indirect tax collection jumped 85% on year in the June quarter against the annual target of a mere 3% rise.

Supply-chain woes and domestic demand compression in the wake of income losses reverberated through the economy, though economic rebound in advanced economies boosted India’s merchandise exports. The share of exports in GDP, in real term, rose to 23.7% in Q1FY22 from 20.5% a year before. However, with the rise in imports, the damaging impact of net exports was higher in the first quarter than a year earlier.

With the ebbing of the second Covid wave, manufacturing activities have gathered pace in the current quarter but the dominant services sector is still in the contraction zone. While the resilience of the agriculture sector is expected to aid rural demand, urban consumption requires sustained growth in manufacturing and at least non-contact intensive services. Also, the release of pent-up demand in the aftermath of the second wave has to acquire a durable character with an accelerated pace of vaccination.

Both the IMF and RBI have projected India’s real GDP growth to recover to 9.5% in FY22 (even with this rate of growth, the country’s real GDP at the end of 2021 would exceed the level in 2019 by just 1.5%).

While some of the high frequency indicators since July also signal a recovery, another positive is robust tax revenues could ease the fiscal situation, allowing the government to make meaningful interventions as the economy struggles to gather pace.

Nominal GDP grew 31.7% in the first quarter from a year before to `51.23 lakh crore and, unlike real GDP, remained 2.4% higher than in the same period in FY20.

The farm and allied sector remained largely insulated from the Covid shocks and grew as much as 4.5% in Q1FY22, against 3.5% a year before. Despite patchy rainfall in August, good distribution in key areasa has buoyed the kharif crop prospects.

Aditi Nayar, chief economist at Icra, said while the base effect has concealed the impact of the second Covid wave, “the sharp year-on-year expansion in Q1FY22 is analytically misleading, with a sequential slowdown of 16.9% over Q4FY21 and a shortfall of 9.2% relative to the pre-Covid level of Q1FY20”.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said: “Economic activity has been reviving since July and has picked up momentum. As vaccination pace picks up we expect the momentum to pickup further, although we remain wary on the evolution of delta variant cases.”

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