Vijay Kumar Gaba

The latest GDP data released by the government has evoked mixed reactions. While less than contraction (-7.3% yoy) in overall FY21 real GDP is a matter of comfort, sharp contraction in private consumption and continued weakness in manufacturing (-6%) is a subject to be worried about. The better than expected economic performance has mostly been outcome of strong government consumption expenditure and large subsidies extended as part of various tranches of stimulus.

In the last quarter of FY21, India’s real GDP witnessed a growth of 1.6%. This is in spite of a poor base of mere 3% growth in 4QFY20 (disruption started in the base quarter) and significant relaxations in lockdown restrictions. This clearly indicate that normalization of economic activities might take much longer than earlier estimated.

I have always stated that quarterly growth data has little relevance for investors. It may hold some relevance for the policymakers to assess if any course correction is needed, but for a common investor it virtually has no meaning.

I also believe that extrapolation of annual real GDP growth data to immediate future years may also produce misleading results. The large projects that started in a year contribute to GDP through Gross Fixed Capital Formation (GFCF) head. However, the second and third round impact of these projects takes years to reflect in GDP growth; whereas the second round impact of consumption expenditure are usually visible relatively in lesser time. It would therefore be appropriate to judge the longer term trend in GDP growth to assess the likely growth trajectory in short term, (1-2years). I usually use 5year rolling CAGR in GDP to assess the likely growth trajectory of GDP in next couple of years.

This trend forewarned of a prolonged economic slowdown as early as FY11-FY12 (see chart). The long term (5yr CAGR) growth trajectory slipped below 6% in FY20, even before the pandemic induced slowdown was triggered. If we adjust the growth for FY21 and FY22 for sharp fall in FY21, and assume a 9% real GDP growth for FY22, we may end up with almost no growth during two period of FY21 and FY22. Assuming a further 8% growth for FY23 and 7% thereafter, we shall be able to attain the long term 6% growth trajectory only in FY27. A higher trajectory would be possible only post FY27. This essentially implies the following, in my view—

1.    The fiscal leverage with the government will become incrementally lesser. So unless the government decides to shed its inhibition and increase the capacity of its printing press, sustaining higher government consumption expenditure will become increasingly challenging.

2.    The private consumption demand might not improve materially in next couple of years as real household income remains stagnant. Discretionary consumption growth will particularly be impacted.

3.    The manufacturing growth will largely depend on exports and capacity building for import substitution. Technology leadership would be more important than the capacities.

4.    Construction and construction material sectors will overwhelming depend on government expenditure on capacity building.

5.    For next couple of years agriculture would remain mainstay of economic growth.