State of the economy
The National Statistical Office (NSO) recently issued the first advance estimates (FAE) of GDP for FY22. This event is considered important, because these estimates are essentially used as input for preparing budget estimates for the next year (in this case FY23). The estimates are derived by extrapolating the previous year (in this case FY21) final estimates using the performance of sector indices in the first 7 to 9 months of the current financial year. These estimates may be subject to substantial revision in case of a material event that may impact the economic performance during the fourth quarter of the current financial year, e.g., lockdown during March of FY20.
FY22e Real GDP to grow 9.2%
NSO has estimated FY22 GDP to grow at 9.2% (-7.3% in FY21), lower than the recent estimates of RBI (9.5%).
Although the FAE accounts for slower growth (~5.6%) in 2HFY22 against 13.7% in 1HFY22, these estimates may not have fully factored in the impact of recent surge in cases of Covid and consequent mobility restrictions. Thus, there is a risk that the actual GDP might be slightly lower than FAE.
The GVA (GDP + subsidies on products – taxes) growth is expected to be 8.6%. This implies that NSO has factored in continuing buoyancy in tax collections in 4QFY22 also.
Most of the higher growth rate in FY22 could be attributed to the low base. As per the FAE, the real GDP for FY22 could be just 1.3% higher than the real GDP for FY20, implying less than 0.7% CAGR for 2years (FY21 and FY22).
Elevated inflation to reflect in higher nominal GDP growth
Elevated price pressures are expected to reflect in higher nominal GDP growth, which is expected to be 17.6% in FY22 (-3% in FY21). It is noteworthy that price pressure has remained elevated in FY22 across goods (food, fuel and others) and services.
Private consumption continue to be sluggish
NSO has estimated private consumption expenditure to grow at a sluggish rate of 6.9% in FY22. This implies that the private consumption in FY22 will remain ~3% below the pre pandemic level (FY20). At 54.8% of GDP, the share of private consumption in real GDP is expected to be lowest in 8 years.
Besides, the key GDP component of Trade, Hotels, Transport and Communication is also expected to remain ~9% below the pre pandemic level (FY20).
It is pertinent to note that higher inflation of FY22 has so far not resulted in significant monetary tightening. Though the benchmark yields have seen significant rise in FY22 (from 6.05% in March 2021 to 6.6% presently), it has so far not reflected in lending rates. For example, SBI MCLR has remained unchanged during FY22 for most tenure.
Government consumption also to slow down
The consumption demand in the economy has been mostly driven by government consumption in crisis time. In FY22 government consumption expense is expected to slow down to 11.6% of real GDP from 11.7% in FY21; though it shall remain higher than 10.6% seen in FY20.
In absolute terms, government consumption is expected to grow 7.5% (at fixed prices) over FY21 and 15% in nominal terms.
Investment growth healthy
Investments are projected to grow at a healthy pace in FY22. NSO expects investments to be 29.6% of FY22 estimated nominal GDP, which is the highest level since FY15. In FY22, investment (Gross Fixed Capital Formation or GFCF) is seen growing 29%. It is also expected to be 18% more than in FY20
Economy expected to grow faster in 2HFY22
NSO expects over half of the projected growth in agriculture, industry and services to come through in 2HFY22. Considering the current state of pandemic led mobility restrictions, these estimates may have some downside risk.
For example, NSO estimates factor in 60% of the projected annual growth in the hospitality sector to materialize in 2HFY22. Clearly this forecast is at risk.
Similarly, 58% of the over agriculture output is expected to materialize in 2HFY22. Considering the inclement weather conditions across North and East India, this estimate may be at some risk.
External risk could rise
Though the balance of payment remained in surplus during 2QFY22, the external risks could rise if exports fail to pick up materially in FY23.
In FY22, BoP has been supported by a capital account surplus of US$40bn (5.3% of GDP) led by higher SDR allocation by the IMF; increased FPI debt inflows; FDI inflows, external borrowings and NRI deposits. However both FDI and FPI inflows have slowed down in recent months.
As per various estimates, a wider trade deficit ($190bn FY22e and $200bn FY23e) is expected to lead the current account deficit to 1.7% in FY22. Kotak Equity Research expects CAD to be 1.7% of GDP, and cautions that for every US$10/bbl increase in average crude price, CAD may increase by US$17 bn (0.5% of GDP). These estimates also assume inclusion of India in global bond indices and consequent $25bn debt inflows. Failing which, the pressure on INR may increase forcing RBI to intervene more aggressively.
Fiscal deficit contained
The government has been to contain the fiscal deficit in April-November 2021 period with the help of lower revenue expenditure, higher tax collections and dividends, and spectrum receipts. However, the disinvestment receipts are significantly lower than the budget estimates.
The lower fiscal deficit allows some leverage to the government to increase investment and consumption expenditure in the last quarter to support demand during the current phase of pandemic restrictions. If this is the case, the yields may continue to stay elevated and pressure on INR will sustain.
Conclusion
Though the Indian economy has recovered well from the shock of pandemic, the recovery is not broad based and continues to be fragile. On the supply side, the two key drivers of growth, i.e., manufacturing and exports continue to lag; whereas on the demand side private consumption continues to be vulnerable. This makes the policy making function rather challenging. Continued supply side constraints may keep the pressure on prices high; tightening the hands of RBI. A rate hike on the other side may hit the already sluggish demand even harder.
FY23 could be a struggle to attain balance between these counter pressures. Obviously the government will have a larger role to play in this and fiscal policy will become more relevant than monetary policy.
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