Services won’t recover till vaccine is fully rolled out and, within manufacturing, it is bigger firms that are doing well
The GDP data for Q3FY21 confirm what has been discussed and deliberated on for some time now, that is the informal economy continues to lag the organised one by a mile. So, while it is good news that we are out of the recession and that industry is back in positive territory, the 0.4% year-on-year (y-o-y) growth in GDP and the 1% y-o-y rise in the GVA largely reflect the revival in the formal economy. Also, agriculture has grown at a smart 3.9% y-o-y, above most estimates.
The December 2020 quarter earnings season made it clear India Inc had pretty much recovered from the lockdown, and the uptrend in GST collections for many months now corroborates that. But, sadly, the informal economy is languishing as thousands of small enterprises bleed; as reflected in the corporate results, the larger companies continue to take away market share from smaller businesses across a host of sectors.
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The second takeaway from the GDP numbers is that the biggest chunk of the economy, services, is not seeing a quick rebound. Construction has done well, ostensibly on the back of the infra build out and real estate, as has financial services. But the trade, hotels, transport, communication & broadcasting segment has contracted by 7.7% y-o-y in the December 2020 quarter, and that has dragged down the services space overall; it stayed flat at near-zero percent y-o-y while industry has grown 1.6% y-o-y. While makers of cars, paints and washing machines may have done brisk business in the festive and wedding seasons, the demand for services—restaurants, hotels, hospitality, trade and transport—remained subdued because of limited mobility. Most schools and offices remained shut while consumers lacked the confidence to travel or to even eat out.
That is the reason private final consumption expenditure (PFCE) contracted by 2.4% y-o-y in Q3FY21; it will probably contract in Q4 as well if there is a spike in Covid-19 infections. A very large number of households has been badly hit by the closure of businesses—small firms, retail outlets, hotels, restaurants—and by large layoffs. In the organised sector, apart from IT and BFSI there are not too many sectors hiring in big numbers. The job market is looking up, no doubt, but income levels are lower as companies are hiring more for part-time and temporary roles. Also, the hefty cost-cuts by India Inc since April 2020, which boosted their bottomlines, would have had a deleterious impact on small households.
Consumer confidence remains low—RBI’s current situation index still trails pre-pandemic levels by a wide margin. Given the economy has suffered a permanent loss of some Rs 20 lakh crore in value-add due to the pandemic, it won’t be surprising if consumption demand stays muted in FY22 too.One puzzling number in the GDP data is the increase in the gross fixed capital formation (GFCF); while there is a base effect because Q3FY20 saw a contraction of a sharp 5.2% y-o-y, the positive 2.6% y-o-y rise is surprising. It is true the Centre has been spending on capex although the state governments may have been unable to do so in equal measure; investment data, however, can be lumpy. Unfortunately, it is unlikely the private sector is going be making chunky investments in greenfield capacity very soon, although industry continues to spend large sums on technology upgradation and on automation and is using the inorganic route to scale up. In fact, the CMIE data on investments and project starts for the December quarter showed very little appetite from both the private and public sector. As economists have noted, it will be hard to create jobs on a large scale unless investments are stepped up. In this context, the PLI-schemes being rolled out for about a dozen sectors hold promise. The Union government must persevere with its plans to build infrastructure because, given the state of the states’ finances, it could be a year before they resume meaningful investments.
In this context, the performance of government consumption expenditure, which de-grew 1.1% y-o-y, was somewhat disappointing; as a share of GDP, it was just 9.8%—the lowest in eight quarters. Public administration, defence and other services contracted 1.5% y-o-y; while the Centre may have spent, the states, which contribute over 70% of public consumption spending, may have been hamstrung by a shortage of revenues. The economy should gain from the fairly large fiscal deficit in FY22, but this expansionary policy may need to be pursued for a few more years.
The March quarter is expected to be better , with the infection rate having fallen sharply and allowing for greater mobility. However, the services sector will continue to languish for a couple of quarters, until the vaccination drive nears completion. About a third of the non-agri GVA comprises the informal sector, and until the pain here subsides, the economy can’t get its full strength back. GDP growth in FY21 is now estimated to grow at a slightly weaker minus 8%, from the minus 7.7% estimated earlier. On this base, FY22 will see a robust rebound, possibly 10-11% real GDP growth. But that would be meaningless and nothing to cheer, really, because right now, it looks like growth won’t recover meaningfully even in the medium term. And that is worrying because it could mean more inequality.