Pick-up in volumes underpinned improved growth

Indian economic growth recorded a welcome improvement in Q4 FY2021, as per the data released by the National Statistical Office (NSO). This benefitted from the broadbased surge in volumes that had been portrayed by a wide gamut of high frequency indicators, although the impact of the low base related to the onset of the nationwide lockdown can’t be entirely brushed away.

So how much did the pace of growth improve, relative to the performance in the third quarter, and was the expansion higher or lower than expected?

The answers to these two questions are somewhat complicated. On one hand, the expansion in gross value added (GVA) at basic prices (at constant 2011-12 prices) rose sharply to 3.7 per cent in Q4FY21 from 1.0 per cent in Q3FY21, and also exceeded our 3.0 per cent forecast. The improvement in the GVA growth in Q4FY21 was driven by a volume-driven surge in industry and a mild turnaround in services.

However, the GDP growth improved modestly to 1.6 per cent from 0.5 per cent, respectively, and trailed our expectation of a 2.0 per cent YOY rise in Q4FY21. The pickup in GDP growth in Q4FY21 was broad-based, led by a spike in government spending, an improvement in investment activity as well as a mild turnaround in private consumption, dampened by a rise in net imports.

The chief factor behind the differential growth rate of GDP and GVA in Q4FY21, is the backended release of subsidies by the Government of India, especially those related to food. Given this, we believe that the trend in the GVA may be a more meaningful indicator of the inherent strength in the economic growth momentum in the justconcluded quarter.

Overall, GDP and GVA contracted by 7.3 per cent and 6.2 per cent, respectively, in FY21, in line with our forecasts (-7.3 per cent and -6.3 per cent, respectively). Moreover, based on the updated GDP figure released by the NSO for FY21, the provisional fiscal deficit of the Government of India is now placed at 9.2 per cent of GDP for that year.

So what does the data for Q4 FY21 portend for the future? The answer may be, not much.

Despite the vaccination drive, the second surge in Covid-19 cases in rural and urban areas, has led to localised lockdowns across various states. This has weakened the sequential momentum of many available indicators. In addition, the healthcare expenses related to the Covid-19 treatment, amidst high retail prices of fuels, are likely to shrink disposable incomes, forcing a cutback in discretionary spending demand.

Having said that, the localised lockdowns have contributed to a downtrend in the new Covid-19 infections in some states, and a staggered unlocking is now awaited. Nevertheless, a high degree of uncertainty prevails regarding the likely growth trajectory over the remainder of this fiscal. At present, we peg the GVA and GDP (at constant 2011-12 prices) expansion in FY22 in an admittedly wide range of 7-8.5 per cent and 8-9.5 per cent, respectively. Where growth eventually ends up, will depend in large part on whether an accelerated pace of vaccine rollout can prevent a third Covid surge.