Vijay Kumar Gaba

 India’s GDP grew 8.4% yoy in 2QFY22, ahead of most estimates. RBI had expected the GDP to grow 7.9% last quarter. This better than estimated growth is some relief at times when worries about worsening of Covid-19 conditions.

The growth was largely driven by Agriculture (4.5%), services including construction (9.9%) and exports (19.6%). Manufacturing growth (5.5% yoy) was below estimates, dragging down the overall industry sector growth to 6.7% yoy. While all segment of services grew at a decent pace, public services and defence were the largest contributors, growing 17.4% yoy.

Business sentiments are at multiyear high, but consumer sentiment is not improving. The household outlook on income is still below pre covid level.

The government has done a good job in managing the fiscal conditions. Subject to the government completing the promised disinvestment, the FY22 fiscal picture may be much better than the budget estimates.

The Covid management is performing very well, with the number of infected people falling to 18month low level. The vaccination program is also progressing well. The new Covid variant has certainly created some uncertainty, but as of now it does not appear that we shall see prolonged and/or extensive mobility restrictions in domestic area.

Pandemic wasted two years of growth

Statistically speaking, FY22 GDP may end up close to FY20 level, registering almost no growth for two years. In fact, 1HFY22 real GDP is about 4.5% (Rs3.17trn) less than 1HFY20 GDP. The nominal GDP of 1HFY22 is just about 7.3% higher than 1HFY20 nominal GDP.

More notably, the contribution of manufacturing; construction; trade, hotel, transport, communication; financial services, real estate & professional services etc., in 1HFY22 is lower than 1HFY20.

The latest macro data, e.g., GST collections, PMI, mobility indicators, labour participation rate, etc. indicates that the momentum has continued in 3QFY22 also. If the concerns about Covid-19 subside in next few weeks, Indian economy may record over 9% yoy growth for full year FY22; and we may achieve the FY20 level of GDP, even though the recovery may continue to be skewed and driven by government expenditure and external trade.

Consumption continue to lag behind

Both private consumption (PFCE) and government consumption (GFCE) spending are still much below the FY20 level.

1HFY22 PFCE at Rs37.32trn is about 7.7% lower as compared to 1HFY20 PFCE of Rs40.44trn. Similarly, 1HFY22 GFCE at Rs7.83trn is about 5.3% lower as compared to 1HFY20.

Even in nominal terms, PCFE has grown just 2% in 1HFY22 as compared to 1HFY20. The nominal government consumption has however grown ~9% over this period.

Investment too below FY20 level

The amount of real investments (Gross Fixed Capital Formation or GFCF) in the economy during 1HFY22 was about 8.2% lower than 1HFY20 level. Even in nominal terms, the GFCF was merely 1.5% higher in 1HFY22 as compared to 1HFY20.

5yr of 8-9% plus growth will take us to long term pre Covid growth trajectory

Pre Covid, India’s long term growth trajectory (5yr rolling CAGR of GDP) was close to 7%, which is closer to the estimated potential growth level of 7.5-8%. The trend was declining since FY18, indicating impairment of potential growth.

Indian economy would need to grow at 8-9% CAGR for next 5years to achieve the pre covid long term growth trajectory of ~7%. To achieve the potential growth rate of 7.5%-8, much higher growth would be needed on sustainable basis.

This would need much more than the higher government support to farmers and manufacturing. Structural reforms that increase the employment opportunities, improve energy security, stabilizes food prices, make tax structure progressive, and improve social and physical infrastructure sustainably must be accelerated.

Headwinds developing for 4QFY22

Though the latest macro data is encouraging, some dark clouds have gathered at the horizon, obfuscating the visibility of growth in 2022.

·  The inclement weather in the ongoing Rabi season, and fertilizer shortages have likely impacted the agriculture sector.

·  Though the overall consumption growth has been lagging; the rural consumption has remained resilient in past one year. The latest data indicates that the resilience of rural consumption maybe breaking.

·   In view of the threat presented by the new variant of Covid-19, many countries have recently imposed fresh mobility restrictions. This may impact exports, which has been one of the key drivers of the growth.

·  Recently, the US Federal Reserve Chairman has indicated that they may consider unwinding the bond buying program (QE) faster than previously forecasted. This faster unwinding is widely expected to result in at least two rate hikes in 2022. Back home, RBI has also started tightening money supply through OMO and other means. The tighter money supply conditions may also impact the growth in 2022.

·  As evident from the recent commentary of consumer goods companies, the persistent inflation, especially energy and food, is beginning to impact the consumption demand.