Headline Q2 growth numbers mask weaknesses

PFCE growth still modest; slow construction, trade and joblessness continue to be a drag

Moreover, at Rs 19.48 lakh crore, PFCE remains smaller than in both Q2FY21 and Q2FY20.
Moreover, at Rs 19.48 lakh crore, PFCE remains smaller than in both Q2FY21 and Q2FY20.

The headline growth numbers for GDP at 8.4% y-o-y and GVA at 8.5% y-o-y, for the September quarter, are encouraging but not good enough to warrant a celebration. While forecasts of 8.3-8.4% y-o-y growth may have been close, most economists were way off on the details; they had pencilled in better numbers from the manufacturing and services sectors and much less growth in the farm sector. In reality, it is agriculture that has grown at a smart 4.5% y-o-y and unexpectedly pulled up growth, on the back of a 3% growth in Q2FY21.

In contrast, industry and services have seen only a modest recovery. Excluding agriculture, forestry and fishing, and public administration, defence and other services, the growth in the GVA would have been a much slower 7.5%.

At Rs 35.73 lakh crore, the output, in the September quarter, is a tad higher than the Rs 35.62 lakh crore reported in Q2FY20. But this masks several weaknesses. Key drivers of the economy—private final consumption expenditure or PFCE—are not rebounding as fast as one would have hoped. At 8.6% y-o-y, the growth in PFCE is modest, since it comes off a very weak base of a negative 11.2% in Q2FY21. Moreover, at Rs 19.48 lakh crore, PFCE remains smaller than in both Q2FY21 and Q2FY20.

Again, one is also not clear to what extent inflation—higher prices—have pushed up the aggregate and how much is volume growth. Nonetheless, it’s evident there is a recovery in consumer spending and the pace will probably gather momentum in the December quarter thanks to spends during the festive season.

Unfortunately, though, wage growth remains subdued both in rural and urban India even as joblessness remains high. Unless the services sector grows faster, employment challenges will persist. Segments such as construction and the segment comprising trade, hotels and transport have not lived up to expectations; construction grew at 7.5% y-o-y—on the back of a contraction of 7.2% in the corresponding quarter of FY21.

The trade, hotels and transport cluster is down 9% from pre-pandemic levels, and could continue to underperform until early FY23. These segments of the economy need to see much more of a rebound for the job market to improve, especially jobs in the informal sector.

Indeed, given capex—especially from the private sector—can be expected to remain sluggish for a long time, the services sector needs to revive. The informal services sector has been badly hit and resulted in huge unemployment. Gross fixed capital formation (GFCF) may have gone up by 11% y-o-y, in the September quarter, but this comes off a contraction of 8.6% y-o-y in Q2FY21. Front-ended devolutions to states will help them spend on capex.

Growth in manufacturing has been a dismal 5.5% y-o-y on the back of contractions in both Q2FY21 and Q2FY20. To be sure, input shortages are partly to blame, but this is undoubtedly worrying from the point of view of employment. The government’s final consumption expenditure, too, was disappointing, rising only 8.7% y-o-y on a weak base of a negative 24% in Q2FY21.

The universe of listed companies is doing well; for a universe of 2,500 companies (excluding banks and financials), the sum of the Ebitda and wage—a proxy for GVA—was up a smart 23% in the September quarter. However, barring a few sectors like IT, BFSI and healthcare, corporate India is not hiring. While GDP growth may still come in at 9-9.3% in the current year, growth in FY23 will be much slower given the base effect would have faded; at this stage, given muted consumption and wage trends, and supply-side disruptions in the form of input shortages, even 6% would be an ask. And Omicron could play spoilsport.

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