Deceptively high GDP expansion
India’ s real gdp expanded by a record-high 20.1 percent in year on-year( yoy) terms inq1fy 22, in line with our own forecast of 20.0 per cent. As anticipated, the distorted base of last year’ s stringent nationwide lock down obs cured the devastation of the second wave of co vi d-19th at was accompanied by staggered state wise restrictions inq1fy 22.
Nevertheless, the sharp yoy expansion in that quarter is analytical ly misleading, as the real Gd pinq1fy 22 not only posted a sequential slow down of 16.9 per cent overq4fy 21, but also trailed the pr e-c ovid level ofq1fy20b ya considerable 9.2 per cent. The NSO has pegged theg va growth inq 1 FY2022 at 18.8 per cent. The GVA growth inq1fy 22 is higher than our forecast of 17 percent, led by the robust rabi harvest, and modest ly better than expected performance of manufacturing, mining and construction. the growth in the contact-intensive portion of the economy trailed our expectation, highlighting how imperative it is for confidence to improve, either through accelerated vaccinations or otherwise, to drive a sustainable recovery in these sectors.
While the central bank’ s consumer confidence survey had revealed a sombre trend in the wake of the second wave of c ovid farm demand buffered private consumption to an extent inq1.hig her capital spending by the centre and states, and an improvement in projectcompletion, boosted investment activity on a yo yb as is inthejust-concludedquarter. Nevertheless, both private consumption and investment remained well below their p rec ovid levels in Q 1 FY 22. In contrast, while government consumption expenditure recorded ayoy con traction of 4.8 percent inq 1 Fy 2022, emerging as a dragon the pace of growth, it exceeded the p rec ovid level by a healthy 7.4 percent. So, what does this deceptively high Gdp expansion port end for monetary policy? theq1fy 2022 Gd pg row this mild ly lower than the monetary policy committee’ s own forecast of 21.4 per cent. As a result, we expect status quo to continue until strengthening domestic demand replaces supply side constraints as the key driver of inflationary pressures. we expect policy normal isa ti onto begin in February, with a change in the stance of monetary policy to neutral from accommodative. We expect gd pg row thin the ongoing quarter to range between 7.8-8.8 per cent, with the absolute level of gdp mildly trailing the pre-covid performance on account of a delayed recovery in services sector. S we expect indian real gdp to exceed the pre-covidlevelsinh2, with the extent of the upside to be dictated by whether the acceleration in vaccination is sustained.