By Sonal Varma & Aurodeep Nandi
GDP growth moderated to 8.4% y-o-y in Q3 2021 from 20.1% in Q2, a shade above expectations (Consensus: 8.3%, Nomura: 8.1%). The moderation reflects unfavourable base effects. On a sequential basis, GDP growth rose by 6.6% q-o-q (sa) after contracting by 8% in Q2, reflecting a swift rebound from the second wave lows. In level terms, GDP stood 2pp above the pre-pandemic level (Q4 2019 = 100) in Q3. The fastest normalisation is seen in exports and investments on the demand side, and agriculture and industry on the supply-side—all of which are above their pre- pandemic levels. However, private consumption is 3% below its pre-pandemic level, while the hardest hit trade, transport, hotel and communication (TTHC) segment is still 9% below its pre-pandemic level, reflecting the uneven recovery.
On the demand side, the sequential improvement has largely been broad-based, across private consumption, investment and exports, although with imports also rising, net exports’ contribution to GDP growth fell to -4.4pp in Q3 from -3.6pp in Q2. Private consumption growth rebounded sharply (+6.7% q-o-q, sa), reflecting the reopening and faster mobility. Government consumption growth rose to 8.7% y-o-y in Q3 versus – 4.8% in Q2, contributing 0.9pp to GDP growth. Meanwhile, the continued focus on public capex likely also aided the sequential rise in fixed investment growth.
On the supply side, GVA growth surpassed expectations at 8.5% y-o-y. The faster rise in GVA relative to GDP likely reflects a larger drag from subsidies on the latter, as indirect taxes have been stellar. The services posted stellar growth of close to 10% y-o-y (9.2% q-o-q, sa in Q3 vs -12.8% in Q2), with the unorganised labour-intensive sectors, such as construction and THTC, growing by 7.5% y-o-y and 8.2%, respectively, with a strong sequential rebound in transportation as mobility increased. The finance, real, estate and professional services sector contracted (-0.3% q-o-q sa), while public administration posted strong growth, reflecting increased government spending. In comparison, industrial GVA growth was healthy at 6.7% y-o-y in Q3, as was agricultural GVA growth at 4.5%.
Looking ahead into Q4, the outlook is more mixed. Mobility has recovered due to lower caseloads, with the Nomura India Business Resumption Index (NIBRI) tracking about 9.5pp higher in Q4 than in Q3, festive sales have been strong and pent-up government spending should add to the growth momentum. On the flip side, there are risks of a demand slowdown in mass consumption segments such as entry-level cars and two- wheelers, and supply-side bottlenecks, owing to chip and coal shortages, which constrained production in October, appear to be easing, but only at the margin.
Consequently, data until October for the Nomura India Normalization Index (NINI) show early signs of flatlining in consumption in Q4, with an incremental improvement in services, investment and the external sectors. Meanwhile, the Nomura India Composite Leading Index (NICLI)—which has a one-quarter lead over non-agricultural GDP growth—has also fallen to 100.2 (provisional estimate) in Q4 from 101.0 in Q3, suggesting a possible drop in near-term growth momentum.
Overall, we pencil in lower GDP growth momentum of 4.1% q-o-q (sa) in Q4 2021 vs 6.6% in Q3, with y-o-y GDP growth slowing to 6.3%. The reopening, exports and government spending should support growth early next year, but high inflation is a risk to private consumption demand, amid muted income growth for lower income households. We expect overall 2021 GDP growth of 8.2% y-o-y (revised up from 7.7%, due to higher Q3), and retain our FY22 projection at 9.2%. On Omicron, India has not yet detected the variant and tighter international travel restrictions should not have much impact (tourism is only about 1.1% of GDP), but this is potentially a risk to the ongoing services sector normalisation, if the fear factor leads to reduced mobility or if domestic restrictions are substantially tightened.
The Q3 GDP outturn is marginally above RBI’s projection of 7.9% y-o-y and confirms the economic recovery from the second wave. While headline inflation has moderated in Q4 so far (due to the base effect) and the recent cut in fuel duties offers some comfort, inflationary pressures continue to build as firms look to recoup their margins.
In our opinion, there could be greater consensus within the MPC that ultra-easy monetary policy is no longer necessary. The Omicron variant does add an additional layer of uncertainty for policymakers. However, the baseline view still points to higher inflation, with headline and core inflation likely to converge at around 6%. Growth does face some medium-term scarring risks, but it is cyclically recovering, and experience suggests that restrictions lead to more upside risks to inflation than downside risks to growth. As such, we see gradual policy normalisation as par for the course. Consequently, we maintain our baseline view of a 40bp reverse repo rate hike at the December meeting, although we acknowledge there is a risk that it may be delivered in two steps (December and February). We also maintain our view of a cumulative 75bp of repo and reverse repo rate hikes in 2022, starting in February.
The authors are Respectively, chief economist, India and Asia e-Japan, and India economist, Nomura
(Edited excerpts from Nomura Global Markets Research’s Asia Insight report dated December 1)