A dwindling recovery: Real test may come over the next few months when pent-up and festival-led demand abate

November 26, 2020 6:30 AM

We expect Q2 GDP contracted 7.9% y-o-y versus the large 23.9% fall in Q1; the real test will likely come over the next few months when pent-up and festival-led demand abate

As per DST, gross domestic expenditure on R&D (GERD) as a percentage of GDP was 0.7% in FY19—low even if one accounts for India's income levels.Q1 GDP growth could be revised up given that corporate sector data is now available, but was not available back in August due to lockdown-led filing delays.

By Pranjul Bhandari & Aayushi Chaudhary

The average of daily new cases remained under 50,000 over the last fortnight compared with ~85,000 about two months ago. However, Delhi is reporting a strong third-wave, and there are risks of the virus spreading. Some cities have already imposed select mobility restrictions to curb the spread.

Economic activity indicators rose quickly over September and October, led partly by pent-up and festival-led demand, in our view. In its latest reading, our recovery tracker moderated a tad compared with the early-November highs. Growth in electricity consumption, labour participation and e-way bills softened a shade. Mobility remained strong with rising non-workplace travel.

After the large 23.9% y-o-y contraction in Q1, we expect a narrower contraction of 7.9% y-o-y for Q2, reflecting the uptick in demand as explained above. The risk to our view is that the Statistics Office reports an even stronger performance on the release date (November 27) that is later revised down over subsequent revisions. The unavailability of real-time informal sector data means that in its first estimate, formal sector data is used as a proxy for informal sector growth. At a time when the informal sector is doing arguably worse, this practice could end up overstating growth. We also believe that the Q1 GDP growth could be revised up given that corporate sector data is now available, but was not available back in August due to lockdown-led filing delays.

Vegetable prices continue to rise in November. However, a favourable base could lead to lower inflation prints going forward. The Reserve Bank of India has been an active buyer of both government bonds and currency assets. Banking sector liquidity has risen back up, bond yields remain contained, and the rupee has depreciated vis-à-vis the dollar in recent weeks.

Co-authored with Priya Mehrishi, economics associate, HSBC Global Research
Edited excerpts from HSBC Global Research’s India Covid-19 Chartbook (dated November 24, 2020

(Bhandari is chief India economist and Chaudhary is economist, HSBC Global Research. Views are personal)

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