Growth Curve: Recovery in Q4 narrows FY21 GDP decline to 7.3%

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June 01, 2021 4:15 AM

The contraction was, however, narrower than the 8% forecast in the second advance estimate put out in late February, primarily because the March quarter turned in significantly better numbers, on the back of rather board-based upswing across sectors including manufacturing, construction and electricity.

India GDP, indian economy, GDP growth, RBI, reserve bank of india, covid-19,Many national and international forecasting organizations including OECD, UN, Moody's, Crisil, among others, have reduced their growth forecast for India’s GDP

India’s gross domestic product (GDP) shrank 7.3% in 2020-21, the sharpest drop in recorded history, with the pandemic dealing a body blow to most sectors of the economy that was already debilitated, according to data released by National Statistical Office (NSO) on Monday. The contraction was, however, narrower than the 8% forecast in the second advance estimate put out in late February, primarily because the March quarter turned in significantly better numbers, on the back of rather board-based upswing across sectors including manufacturing, construction and electricity.

“Public administration and other services” which incidentally include health services that saw an uptick due to Covid management also picked up in Q4. Gross value added (GVA) in Q4 was up 3.7% on year, and GDP, 1.6%, compared with 2.5% and (-)1.1% seen in the second advance estimate. After two successive quarters of deep contraction, the GDP growth had returned to positive territory in Q3, with an expansion rate of 0.5%.

The real GDP contraction reported for the last financial year was still sharper than witnessed by or forecast for many of the country’s neighbours and other emerging market economies. China, of course, remained an outlier with positive growth of 2.3% in 2020. Even Bangladesh is estimated to have grown at 3.8% in 2020. Brazil’s economy contracted by 4.1% in 2020, while Indonesia’s shrank by 2.1% and Malaysia’s by 5.6%.

In the fourth quarter, the economy was indeed witnessing a material recovery before the second Covid wave disrupted the process. While key sectors picked up in the quarter, a solid push by government consumption (up 28.3% on year) also came in aid. While not much subsequent data-points are available, April exports being up 196% on a low base and, more notably, even 18% higher than the corresponding month in 2019 indicates that rebound before the second Covid struck the economy was rather strong.

While a slump in private consumption and investment began in 2019-20, it accentuated in 2020-21. And the bulk of the recovery in the second half of last financial year was without much contribution from these two chief pillars of the economy. Of course, ‘fixed investment’ saw a 11% jump on year in Q4 but that is mostly due to augmentation of the capex by central public sector undertakings and an year-end push to budgetary capex (up 26.5% for the whole of FY21), rather than investments by Corporate India. By reining in costs, large companies have boosted earnings in Q4 and this too had a good share in the GVA reported for the quarter.

The NSO is facing more-than-usual issues when it comes to data collection; the office, therefore, warned that the current estimates were “likely to undergo sharp revisions in due course, as per the release calendar”.

After five successive quarters of negative growth, manufacturing sector witnessed 1.7% growth in Q3FY21 and 6.9% in Q4. Construction grew 6.5% in Q3 and a solid 14.5% in Q4. Electricity GVA rose 7.3% in Q3 and 9.1% in Q4. “Trade, hotels, transport and communications”, a large segment, improved too by reporting a narrower contraction of 2.3% in Q4 compared with 7.9% contraction in the previous quarter.

For the year as a whole, FY21 saw the share of private final consumption expenditure in GDP to slip to 56% from 57.1% in the previous year; gross fixed capital formation also declined from 32.5% to 31.2%. Government, even as it faced a resource crunch, incurred higher fiscal deficit (9.2% of GDP for Centre) to opportunely increase the share of government final consumption expenditure in GDP to 11.7% in FY21 from 10.6% in FY20.

As for the current financial year (FY22), most forecasters have revised their India growth projections to 9-10% range, from 11-14% or thereabouts previously, in the wake of the second Covid wave in the country being more sudden and severer than expected. Moody’s, for instance, sharply trimmed its India growth forecast for FY22 to 9.3% from 13.7% and stated that the severe second wave of coronavirus infections will “slow the near-term economic recovery and could weigh on longer-term growth dynamics”.

In its annual report released recently, the RBI, which had estimated GDP growth of 10.5% for FY22, retained it for the time being but said that, “The pandemic itself, especially the impact and duration of the second wave, is the biggest risk to this outlook. Yet, upsides also stem from the capex push by the government, rising capacity utilisation and the turnaround in capital goods imports.” The central bank iterated that the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.

There was release of quite a bit of pent-up demand for consumer goods in the months that followed last year’s lock-down, but given the uncertainties over the duration of the pandemic and rising unemployment, consumer sentiments appear to be at a low ebb right now.
Nominal GDP shrank by 3% last fiscal, better than a 3.8% contraction calculated in the second advance estimate and compared with 7.8% a year before. Importantly, higher-than-estimated nominal GDP for FY21 (Rs 197.45 lakh crore vs the budgeted Rs 194.82 lakh crore) has reduced the Centre’s fiscal deficit to 9.2% of GDP from 9.5% announced in the Budget in February. This also factors in the fact that the government contained fiscal deficit at Rs 18.21 lakh crore, against the revised estimate of Rs 18.48 lakh crore when the Budget was presented.

A steep fall in imports, caused mainly by battered domestic demand in the wake of the pandemic, somewhat reduced the damaging impact of net exports, even though exports, too, maintained a roller-coaster ride last fiscal. While the share of exports (in real term) in GDP improved a tad to 19.9% in FY21 from 19.4% a year before, that of imports dropped to 21.2% from 22.8%.

Commenting on the GDP data, chief economic advisor Krishnamurthy V Subramanian stressed that the “annual numbers signify a revival in demand”. He added that the second Covid wave may have hit the recovery process. While the services sector contracted by 8.4% in FY21, industry shrank by 7%, he said.

Advocating continued monetary and fiscal policy support, Subramanian said: “Experience from other countries suggests a lower co-relation between falling mobility and growth, as economic activities have learnt to operate ‘with Covid-19’.” However, the speed and the scale of the current second wave “lends caution to the economic impact, as the economy was still recovering from last year’s supply and demand shocks”.

Going forward, the extent to which localised restrictions are continued will likely impact the timelines of the economic recovery, said Aditi Nayar, chief economist at ICRA. “Other key monitorables are whether an accelerated pace of vaccine rollout can prevent a third Covid surge. Needless to say, the economic outlook remains highly uncertain….”

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