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.
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 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.
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.
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
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.
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.
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.
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.