Recession over, double dip ahead
With growth mercifully reemerging in both the GDP and the gross value added (GVA) in real terms in Q3FY21, the pandemicinduced technical recession in India has ended, in line with our expectations. Interestingly, the National Statistics Office (NSO) has pegged the pace of growth in Q3FY21 at 0.4 per cent for the GDP, and a higher 1.0 per cent for the GVA, whereas we had projected the expansion in both these metrics at 0.7 per cent.
The performance of the services sector in Q3FY21 was in line with our expectation (-1.1 per cent), whereas industrial growth exceeded our forecast (+2.7 per cent vs. +2.1 per cent). Moreover, agricultural growth has been pegged at 3.9 per cent in Q3FY21, modestly higher than our projection of 3.5 per cent. This also marks an improvement over performance in the previous three quarters, benefiting from the healthy kharif harvest and rise in rabi sowing.
The big surprise in terms of the sectors of production is the healthy expansion of 6.6 per cent and 6.2 per cent, respectively, in financial, real estate and professional services, and construction. However, the performance of mining and manufacturing trailed our expectations, with a deeper contraction (-5.9 per cent vs. -3.0) in the former, and lower growth (+1.6 per cent vs. +4.0) in the latter.
The YOY performance of the components of GDP indicates a welcome growth of 2.6 per cent in gross fixed capital formation, juxtaposed with mild de-growth of 1.1 per cent in government consumption expenditure and 2.4 per cent in private consumption expenditure.
The sharp pick-up in the capital spending of the Government of India has spurred the growth in gross fixed capital formation in Q3FY21, even as state government capital spending contracted, and private sector participation remained uneven and subdued.
Despite the improvement generated by the festive season, private final consumption expenditure continued to contract in Q3FY21, and trailed the performance of investment and government spending. This is in sync with the muted pick-up in consumer sentiment revealed by the RBI’S latest survey, with the current situation index continuing to trail the pre-pandemic levels by a wide margin in January 2021.
Surprisingly, even though the revenue spending of the GOI and the state governments reverted to growth in Q3FY21, the government’s final consumption expenditure component of GDP displayed a mild contraction in that quarter.
The NSO has also released the Second Advance Estimates for FY21. These place the contraction in GDP at 8.0 per cent, and in the GVA at a narrower 6.5 per cent, for the current fiscal. Notably, the estimated de-growth in the GVA, excluding agriculture, is pegged at 8.1 per cent, similar to the pace of decline projected for the GDP for FY2021.
Based on the Second Advance Estimates for FY21 and the data for the first three quarters of this fiscal released by the NSO, we have calculated the implicit YOY performance for Q4FY21. Our calculation indicates that the NSO expects a moderate improvement in GVA growth to 2.5 per cent in Q4 FY21. This is broadly in line with our own projection (+2.6 per cent), with various lead indicators recording a loss of momentum so far in Q4FY21, in contrast to the improvement in sentiment brought on by the vaccine roll-out.
Intriguingly, GDP is implicitly projected by the NSO to slip back into a contraction of 1.1 per cent in Q4FY21. This appears to be a consequence of the back-ended release in the Government of India’s subsidies that is on the anvil in Q4FY21, which is contributing to a sharp decline in the component of indirect taxes less subsidies in the ongoing quarter.
The formal part of the Indian economy has shrugged off the pandemic blues and is gaining traction at the cost of the smaller and less formal segment. This is hastening the process of the formalisation of the economy and contributing to a consolidation in favour of the larger and more reputed players in certain sectors.
While the informal and contact-intensive sectors will heal more gradually, the lack of adequate proxies constrains a deeper analysis of the state of their recovery.
Looking ahead, we expect consumption to strengthen only modestly in Q4FY21, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact-intensive industries and the self-employed.