GDP growth: Making of a V-shaped recovery

Recent economic indicators show that India has recovered completely from the Covid induced jolt, and this speaks volumes about Prime Minister Narendra Modi’s Atmanirbhar Bharat initiative, that has withstood the ravages of the pandemic, without buckling in.

India’s economy continued to expand in the July-September 2021 quarter, marking the fourth consecutive quarter of growth. India’s GDP grew 8.4%, year on year (YoY) in September quarter, against a contraction of 7.4% during the same period last year. Effectively speaking, GDP at Constant (2011-12) Prices in Q2 of 2021-22 (2QFY22) is estimated at Rs 35.73 lakh crore, as against Rs 32.97 lakh crore in Q2 of 2020-21 (2QFY21) and Rs 32.38 lakh crore in the previous quarter (1QFY22). 2QFY22 real GDP growth at 8.4% was in fact, slightly ahead of consensus expectations. The higher growth among other things can be attributed to nine consecutive quarters of over 3% agriculture growth, which has had a multiplier effect on consumer spending.

A large part of the growth upside was also driven by spending on public administration, education, health, etc. Overall, the sharp turnaround from the COVID second wave was visible across all segments, making the growth broad based in the September quarter. Investment growth remained strong even when compared to 2QFY20 (pre-Covid) levels. Growth will be well supported in 3QFY22 too, on account of festive season and better performance from the Services’ sector. Momentum remains well on track for a full year GDP growth of 9.5% in 2021-22 (FY22), which is what RBI and global rating giant, S&P are projecting too.

With a new COVID variant (Omicron),starting to spread globally, uncertainty on its impact on the global economic scenario may weigh upon things a tad bit, but on the flip side this would essentially imply that rate increases globally, and will be more calibrated and not happen any time soon, assuming they happen at all to start with. No Central Bank would want to nip the greenshoots that have taken root,by raising interest rates wantonly at this stage, despite the temptations, given that headline inflation and bond yields globally have been on the rise of late. India, in fact, has done far better than global peers on the inflation front. Annualised inflation in the UK is 5 6% and 6.2% in the U.S.A— with inflation in USA the highest ever since 1990. In India, retail inflation in October 2021 was 4.48% and food inflation 0.85%,after a reading of 4.35% and 0.68% respectively, in September 2021. While the RBI would continue with an accomodative stance, it will possibly wait for some more clarity before moving decisively on rates, though a reverse repo rate hike in February 2022 cannot be completely ruled out. RBI’s excellent job in reining in bond yields at around the 6.35% levels and thereby keeping a lid on government’s borrowing costs needs a special mention. In USA, yields have gyrated wildly from a low of less than 0.5% in 2020,to a high of over 1.74% in 2021.

The Q2 GDP growth data at a healthy 8.4% apart, the nominal GDP in September quarter stood at 17.5%. While worldwide, the US is possibly into the 6th Covid wave as per experts, and Europe in last few weeks has also seen a big surge in COVID numbers. India, on the other hand, has done a commendable job on this front, with over 125 crore vaccines administered. Both daily and weekly positivity rates are less than 1% and over 64 crore COVID tests have been conducted already. Multiple levers in the economy like Infra spend, low-interest rates, rising demand in the real estate sector and growing consumer demand are going to aid the GDP growth in the coming quarters. From the GVA perspective, farm, construction and public administration & defense services (PADS) grew faster than expected. The sharp increase of 17.4% in PADS was a big surprise in the 2QFY22 numbers. Farm economy continues to display remarkable consistency, with agri growth of 4.5% in September 2021 quarter, after an equally strong 4.5% growth in the June 2021 quarter too. Importantly, the broad story remains intact. While capacity utilization levels have improved, private investment is also on the mend, as corporates and banks are gradually shedding risk aversion, despite some nagging headwinds. High commodity prices and global supply bottlenecks posed a challenge for the Manufacturing sector worldwide. Tax collections aid government finances and it is here that the Modi government has seen big support from buoyant tax realisations. Fiscal deficit was contained at 36.3% of budget estimate (BE) in first half of this financial year, even while expenditure picked up. The multi-year low, fiscal deficit ratio can be attributed to robust revenue growth, outpacing expenditure rise, during first half of the fiscal. Capital expenditure at 45.7% of the target,also showed encouraging trend in line with the government’s focus on asset creation.

The economic activity in Q2 FY22 received favorable support from recovery in Manufacturing and Construction. The gradual removal of lockdown, good monsoon year and the rapid pace of vaccinations helped boost consumer confidence. The risk arising due to the Omicron variant are unlikely to be an obstacle to growth, going forward. Continued low interest and easy liquidity policy will help sustain the tempo.

Mining, Construction and Real Estate showed considerable growth in 2QFY22,at 15.4%, 7.5% and 7.8% respectively. A good monsoon year reflected well with high agricultural output. Private consumption is likely to pick up traction, as we complete normalization. The private capex will likely catch up with government spending and aid growth even further. Gross fixed capital formation (GFCF) grew by a solid 11% in 2QFY22, after a massive 55.3% growth in 1QFY22. The data will have a positive bearing on the RBI’s MPC meeting next week. The low interest, excess liquidity policy has been paying good dividends, across most major economies. Going forward, the way countries across the globe handle rising inflation and movement of crude oil prices, will have an impact on the growth rate across the globe. India— with a bumper crop, with food production in excess of 303 million tonnes in FY2021, the highest food output ever in the last seven decades— enjoys some inherent natural advantages which most large economies don’t.

During the July-September 2021 quarter, Trade, Hotels, Transport, Communication & Services related to Broadcasting sector,grew at 8.2%.Public Administration, Defence & Other Services grew at 17.4% during the July-September quarter, against 5.8% during the previous quarter. Government Final Consumption Expenditure (GFCE) came in at Rs 3.61 lakh crore in the second quarter of the fiscal year (2QFY22), against Rs 4.21 lakh crore in the previous quarter. GDP at current prices grew 17.5%.GDP at Current Prices in Q2 2021-22 is estimated at Rs 55.54 lakh crore, as against Rs 47.26 lakh crore in Q2 2020-21, showing a growth of 17.5%, as compared to 4.4% contraction in Q2 2020-21 (2QFY21). Private final consumption expenditure grew to Rs 19.48 lakh crore in the July-September 2021 quarter, up from Rs 17.83 lakh crore in the previous quarter. Manufacturing sector grew by 5.5% in the September quarter while the Construction sector grew by 7.5%. Both the sectors posted a healthy growth, which bodes well for the economic trajectory going forward.

India’s GDP at Constant (2011-12) Prices in Q2 2021-22 (2QFY22) is estimated at Rs 35.73 lakh crore, which is higher than the Rs 35.66 lakh crore seen in the first quarter of 2019-20 (1QFY20), signalling that India has recovered completely from the COVID induced jolt, which speaks volumes about Prime Minister Narendra Modi’s Atmanirbhar Bharat initiative,that has withstood the ravages of the pandemic,without buckling in.

A robust Construction sector, recovery in Contact-intensive services and pickup in government spending are supporting the Services’ sector, adding to the overall momentum. India’s Eight Core Sector data recorded 7.5% growth during the month of October 2021. Eight Core Sector data came in at 15.1% during the April-October period, which is again a good news.

After lagging the recovery during the initial phases, Q2 of this fiscal year, saw Services’ activity playing catch up. Relative control over new infections and a phenomenal increase in vaccination drive, helped improve Services’ activity. Indeed, while few supply shortages weighed on Manufacturing, the Services’ recovery scaled greater heights. Consumer and business optimism are improving sharply, leading to an uptick in job creation across sectors. Revenue Receipts up to October 2021 stand at 12.59 lakh crore against the budget estimate (BE) of Rs 17.88 lakh crore,which is 70.5% of BE. The fiscal Deficit for the April-October period stands at 36.3% of the budget estimate of Rs 15.07 lakh crore. Fiscal deficit during the same period last year stood at 119% of the budget estimates.

The gross value added (GVA) in Q2FY22 has grown by 8.5%, as compared to a decline of 7.3% in the same quarter last year. In Q1 of FY22, the GVA had sharply surged by 18.8%.

Private Final Consumption Expenditure (PFCE) in the July-September 2021 quarter rose by 8.61%,year on year,after a solid rise of 19.35% Q1FY22. The gap between GDP and GVA was driven by higher tax revenue collection and lower subsidy pay-outs.

The sharp 10.1% growth in Services, in 2QFY22, the biggest sector in India’s economy, is reflective of overall momentum.

In fact, Services’ PMI accelerated to a 10.5 year high in October 2021. This came about even as local companies increased prices of their final products due to costly raw materials, driven by rising input and commodity prices globally. Interestingly, unlike their Manufacturing counterparts, Services’ companies hired more hands, resulting in job generation reaching the highest level after the pre-Covid period of February 2020.

Services’ PMI index rose to 58.4 in October 2021,from 55.2 in September 2021, which clearly signals that the third quarter of the current fiscal year of 2021-22,may witness even higher GDP growth. PMI numbers, both for Manufacturing and Services, for October 2021,endorse the fast-paced,V shaped economic recovery that is underway.

GST collections of over Rs 1.3 lakh crore each, in October and November,bode well. In fact,the GST revenue in November 2021 is the 2nd highest monthly collection,ever since GST came into effect in July 2017.

According to respondents of the PMI Services’ survey, ongoing improvements in demand boosted growth in sales and subsequently in output. New work intakes increased at an accelerated rate, the strongest since July 2011.Companies linked sales growth to better underlying demand and successful marketing. Firms were able to secure a healthy intake of new work, despite charging more for their services. Output prices rose at a solid rate, again, the strongest since July 2017. Anecdotal evidence suggests that additional cost burdens were passed on to clients, reflecting the fact that purchasing power is back. Composite PMI reading in October 2021 came in at 58.7, the highest since January 2012, compared to 55.3 in September 2021.

Data by the Controller General of Accounts showed that the Central government spent 52.4% of its total expenditure target by October 2021, against 54.6% during the same period a year ago. However, the government exhausted only 36.3% of the year’s fiscal deficit target due to robust growth in revenue receipts. In effect, the Modi government has managed the growth versus inflation conundrum very effectively, without indulging in unwanted fiscal profligacy. The Dun & Bradstreet, Composite, Business Optimism Index (BOI) for ongoing quarter, stands at 94.6, up 27.4% compared to the September quarter. Data shows five out of six Optimism indices have registered an increase in ongoing quarter, as compared to September quarter. Arun Singh, Global Chief Economist at Dun & Bradstreet says, the GDP growth during the October-December quarter of 2021 (3QFY22) is likely to be much stronger, as the BOI has surged to an almost eight-year high.

The survey shows that around 79% of the respondents expect the volume of sales to increase in the December 2021 quarter, compared to 67%,in the quarter before. 62% of the respondents expect an increase in net profits in December 2021 quarter, compared to 48% in the September 2021 quarter. In fact, the business optimism levels in the ongoing quarter are at their highest ever levels since second quarter of 2014, as per Dun & Bradstreet, based on vital parameters like rate of hiring of new employees, output prices, and inventory levels. Clearly, if the 20.1% GDP growth in the June 2021 quarter was the harbinger of renewed economic momentum, the continued traction across all sectors and user segments in the September quarter cements the belief that the making of a V-shaped recovery in India, is now a full-blown one, for more reasons than one. The mega vaccination drive under the astute leadership of Prime Minister Modi, has been one of the key drivers of this “feel good” factor, that is now translating into hard numbers.

The writer is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘Truth & Dare-The Modi Dynamic’. Views expressed are the writer’s personal.