India’s GDP growth for Q3 FY21 has come in at 0.4%, versus the -7.3% recorded in Q2 of FY21. Earlier, the contraction for Q2 had been estimated at 7.5%, but has now been revised upwards to a decline of only 7.3%. Q1, on the other hand, has been revised from a 23.9% to a 24.4% contraction. The NSO said, “GDP at constant (2011-12) prices in Q3 of 2020-21 is estimated at Rs 36.22 lakh crore, as against Rs 36.08 lakh crore in Q3 of 2019-20, showing a growth of 0.4%.”
Will the Indian economy have a V-shaped recovery, as is now increasingly being touted? The answer, without doubt, is a resounding yes! With a Covid recovery rate of over 97%, a mortality rate of barely 1.4% and an active caseload of only 1.2%, and with over 15 million people vaccinated, the overall economy of the country is rapidly moving back to normalcy and the GDP numbers are only going to get better in Q4. This is evident from the IHS Markit India Manufacturing PMI reading of 57.5 and 57.7, recorded in February and January 2021, respectively. Composite PMI reading rose from 55.8 in January 2021 to 57.3 in February, the highest since October 2020, while Services PMI rose from 52.8 in January to 55.3 in February, the highest in a year. Unified payments interface (UPI) trades hit a new high of 2.3 billion transactions in January 2021, amounting to Rs 4.31 lakh crore in value terms. The blistering pace continued in February 2021, with 2.29 billion transactions, amounting to a value of Rs 4.25 lakh crore, further corroborating the full-fledged V-shaped recovery which is taking shape.
Services growth in Q3 fell by 1%, which is much lower than the 11.3% fall seen in Q2 and the 21.4% fall in Q1. Agriculture growth has come in at a solid 3.9% in Q3, versus 3% in Q2. Manufacturing sector grew by 1.6% in Q3, which is great news as the big decline of 35.9% in Q1 and the 1.5% fall in Q2, at the height of the Covid pandemic, has now turned into a positive number. The industrial sector witnessed a growth of 2.7% versus a -3.03% growth in Q2. This 2.7% growth was supported by a manufacturing growth of 1.6%, electricity, gas, water and utility services growth of 7.3% and a healthy growth in construction at 6.2%. The high traction in the real estate sector was on the back of the reduction in stamp duty and other levies across various states, thereby attracting home buyers to invest in new homes.
The output of eight core infrastructure sectors grew 0.1% in January 2021 as compared to last year. The infrastructure output, which comprises eight core sectors, including coal, crude oil, and electricity, fell by 8.8% during the April-January period in 2020-21, against a growth rate of 0.8% in the corresponding period in 2019-20. However, Q4 should see a turnaround in the infra space. The Modi government’s decision to invite private investment in 400 port and shipping projects worth Rs 2 lakh crore will give a fillip to the infra space. The Modi government is also aiming to attract investment worth Rs 3.39 lakh crore during the Maritime India Summit 2021, that kicked off on March 2, 2021.
The Indian Railways carried 119.79 million tonnes of freight in January 2021, the highest ever in a month, beating its previous record of 119.74 million tonnes in March 2019, showcasing how the Indian economy’s momentum is gaining rapid traction. In February 2021, the Indian Railways’ loading was 112.25 million tonnes, which is 10% higher compared to February last year, which had been 102.21 million tonnes. On just February 28, 2021, the freight loading of the Indian Railways was 5.23 million tonnes, which is 37% higher compared to last year’s loading for the same date, at 3.83 million tonnes.
For the December 2020 quarter, cement major ACC saw a solid 73% jump in profit, while cement behemoth Grasim saw profits rise by a massive 107%. Since cement sales are a lead indicator, it should be suffice to say that a core sector bounce is back on the cards. Car sales, another lead indicator, continued to be robust with a 16% growth year on year (YoY) in January 2021, with Toyota, Tata Motors, Honda and Nissan, witnessing a YoY growth of 92%, 94%, 114% and 220%, respectively. In February 2021, while Maruti saw a growth of 11.8% year on year (YoY), tractor major Escorts saw a growth of 30.6%, showing the all-pervasive nature of a demand resurgence that is underway in both rural and urban areas.
The economic growth in the coming year, i.e., 2021-22 (FY22) will be robust, with a broad-based momentum across various sectors. The government’s focus on infrastructure, real estate demand on the back of low-interest rates, recovery in commodity prices and healthy consumption expenditure all point to better times for the GDP trajectory. Private and foreign investment is also on the rise and capex should be higher than in previous years, aiding long-term growth. In the last one year, FPI and FDI inflows put together have been in excess of Rs 2.32 lakh crore, which speaks volumes about India’s attractiveness as an investment destination, all thanks to Prime Minister Narendra Modi’s courage of conviction and reformist mindset which is now bearing fruit.
Significant recovery in manufacturing and construction segments also augurs well for the support these sectors are expected to provide to growth in FY 2021-22. Real GVA in manufacturing has improved from a contraction of 35.9% in Q1 to a positive growth of 1.6% in Q3, while in construction the recovery has been from a contraction of 49.4% in Q1 to a positive growth of 6.2% in Q3. Going ahead, only for a quarter at the most, we are likely to see the continuation of a K-shaped recovery, with some sectors growing faster than others. However, beyond Q4 FY21, the K-shaped recovery will soon transform into a sharp V-shaped recovery that will be both fast-paced and broad based in FY22.
The growth stimuli available from the Union Budget and additional measures, including the production linked incentive (PLI) scheme, will lead to a sturdy growth path over the recovery horizon. The real push will be visible in the Q4 (January-March) 2021 because lockdowns in many sectors, particularly hospitality and travel, have begun to ease substantially. The 1% growth in GVA and 0.7% growth in core GVA (core GVA excludes agriculture and public administration), in particular, marks the end of a contractionary phase. In fact, all the sectors except (a) mining and quarrying, (b) trade, hotels, transport and communication services, and (c) public administration, defence and other services, have recorded positive growth in the third quarter of FY21, which is great news as it vindicates the flurry of GDP upgrades seen in recent times. Even in trade and hotels, the pace of decline has slowed down significantly from a negative growth of 15.3% in Q2 to 7.7% in Q3. In public administration, the pace of fall has been reined in at -1.5% from -9.3% in Q2. The construction sector, which contributes about 9% to India’s GDP, is back with a bang on the back of a strong recovery in execution, registering a 6.2% growth in Q3 from -7.5% in Q2, which is nothing short of outstanding. India is amongst the very few economies which are posting growth for the December 2020 quarter—one amongst 16 major world economies – which shows that Prime Minister Narendra Modi’s Rs 30 lakh crore stimulus package has been able to boost both business sentiment and spending via the multiplier effect.
While gross fixed capital formation (GFCF) has improved from a contraction of 46.4% in Q1 to a positive growth of 2.6% in Q3, private final consumption expenditure (PFCE) has recovered from a contraction of 26.2% in Q1 to a much smaller contraction of 2.4% in Q3. The revival of investment demand, triggered by capital spending by the Modi government, has helped in a big way. Besides the overall uptick in the economy, the resurgence of GFCF in Q3 was also triggered by capex by the Central Government, that increased year-on-year by 129% in October, 249% in November and 62% in December 2020. The fiscal multipliers associated with this capex are at least 3-4 times larger than government final consumption expenditure (GFCE), as capex induces much higher consumption spending than normal income transfers.
For the fortnight ending January 8, 2021, credit growth has picked up to 6.6% YoY, while deposit growth is 11.4%. Excellent results by banking sector biggies showcase the ongoing economic momentum. HDFC Bank and ICICI Bank posted profit growth of 18% and 19%, respectively, for the December 2020 quarter, with the retail loan book growing by anywhere between a healthy 13% to 16%. The robust profit growth for these two banking giants came about, despite a high provision coverage ratio (PCR) of 148% for HDFC and 78% for ICICI.
Needless to add, the Indian economy has seen a superb rebound from the onslaught of the Covid-19 pandemic, thanks to the Modi government’s relentless war against the Wuhan virus. From being a net importer in March 2020 to becoming the world’s second largest exporter of PPE kits and N95 masks, it is a telling tale of how “Make in India” is about a grand vision and also about the ability to translate that vision into a meaningful end result. India produced more than 60 million personal protection equipment (PPEs) and almost 150 million N-95 masks till October 2020, from almost zero in March 2020. India also exported more than 20 million PPE and over 40 million N-95 masks during this period. Speaking of Covid, the two states that account for over 72% of all the active coronavirus cases in India are Maharashtra and Kerala, one where the Congress in in power with allies and another which is a Left-ruled state. The horrific performance by these two states in reining in Covid is a testimony to all that is woefully wrong with both the politics and economics of the Congress and the CPI(M).
With a pro-growth budget, structural farm and labour market reforms and the Modi government’s bold decision to raise Rs 2.5 lakh crore by monetising 100 sick, loss making and unviable CPSEs, coupled with the RBI’s resolve to support the financial markets and economy, the Indian economy is well poised to ride the long-term structural growth path, despite states like Maharashtra being a drag due to the misgovernance of the Congress-centric Maha Vikas Agadhi (MVA) alliance.
Investments were the primary driver in pushing up Q3 GDP numbers and were up 2.1% YoY, versus a fall of 28.2% in the first half of fiscal year 2020-21 (1HFY21). Consumption was down only 2.2% YoY in Q3, versus a sharp fall of 16.7% in 1HFY21. The 4.9% growth in consumer durables and 2% growth in consumer non-durables in December 2020 are a precursor of demand resurgence. Even two-wheeler major Hero Moto Corp, for the last six months, has been selling over 4.5 lakh units every single month, with more than 14 lakh units sold in just the two months of October and November 2020. Tractor major M&M too has seen utility vehicle sales growing in excess of 20% on an average in the last few months, pointing towards a demand rejuvenation. Nominal GDP grew strongly at 5.3% in Q3, implying that GDP deflator was 4.8% in 3QFY21. While CSO/NSO expect a contraction of 1.1% YoY in 4QFY21, implying an 8% fall in FY21, this is highly unlikely. Many domestic investment banking houses believe Q4 real GDP growth could be as high as 3.5%, leading to a GDP decline of only 6.7% in FY21, versus CSO’s more conservative estimate of an 8% decline in GDP in FY21.
An 8% or 6.7% GDP decline is less relevant. The more relevant part is that growth momentum is picking up pace significantly, with GST collections in January 2021 at Rs 1.19 lakh crore and February collections being equally healthy at Rs 1.13 lakh crore. GST collections have topped the Rs 1 lakh crore mark every single month from October 2020. FASTag collections hit Rs 102 crore last Friday, crossing the earlier high of Rs 80 crore collected by way of toll in a single day. E-way billing is applicable for inter-state sales in excess of Rs 50,000. Rs 6.42 crore E-way invoice reference numbers (IRNs) were generated in January 2021, versus a number of just 26 lakh IRNs that were generated in September 2020, once again vindicating the sharp uptick in routine business activity.
The GVA equivalent of manufacturing companies, arrived at after adding up wages, depreciation, interest and profit before tax (PBT), grew a robust 17% on a yearly basis in Q3 FY21, after a 9% growth in Q2 this fiscal and a 29% contraction in Q1. Since manufacturing GVA is a leading indicator of the manufacturing sector’s performance, the sharp uptick in manufacturing GVA is indeed highly reassuring. In many cases, GVA equivalent is a better predictor of manufacturing sector’s performance than IIP since the latter captures volume of production while the former captures value of production, ICICI Securities argues. Hence, the manufacturing sector is expected to record a healthy growth in the upcoming Q4FY21. The manufacturing GVA currently has a share of 19% in the country’s real gross value added (GVA).
Moody’s has raised India’s growth forecast to 13.7% for FY22, from the earlier 10.8%. For the current FY21 fiscal also, Moody’s revised its prediction of a contraction in real GDP to 7.1%, from the earlier projected contraction of 10.6%. Interestingly, Moody’s has also said that the Modi government’s fiscal deficit for FY21 and FY22 could be much lower than the projected 9.5% and 6.8% of GDP, respectively, supported by stronger revenue generation in the fourth quarter of FY21 and higher nominal GDP growth in 2021-22 (FY22). The big upside to growth projections in FY22 are absolutely realistic and not based on a low base effect. Rather, the massive growth upside in FY22 will be driven by facilitative government measures, including the Modi government’s capital expenditure increases, with the Central Government budgeting an impressive 34.5% rise in capital spending at Rs 5.54 lakh crore in FY22, compared to the revised estimate for FY21.
Exports which were lagging too have begun to pick up, with a 6% YoY growth in January 2021, and February seeing only a minor fall of 0.25%. Imports also grew by 7% in February, versus a 2.03% growth in January 2021. Interestingly, in February, while oil imports fell by 16.63% YoY, non-oil imports rose by 16.37%, suggesting both an economic revival and improving terms of trade.
The initial policy choice of “lives over livelihoods” succeeded by “lives as well as livelihoods” is now bearing excellent results, converging with the foresight the Modi government had about an imminent V-shaped recovery when it entered the war against the pandemic. The sharp V-shaped recovery is being driven by rebounds in both private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) as a combination of the astute handling of the lockdown and a calibrated fiscal stimulus that has allowed strong economic fundamentals to trigger quick resumption of high activity levels in the economy. It would be apt to sum up India’s swift economic recovery with a brilliant quote from Prime Minister Narendra Modi’s Independence Day speech last year, where he emphasised the relevance of Aatmanirbhar Bharat, when he said, “It is now time for India to move forward with new policies and new customs. Now simple and ordinary will not work. Our policies, our processes, our products, everything should be the best.”
The author is an economist, national spokesperson for the BJP and the bestselling author of ‘Truth & Dare: The Modi Dynamic’. The views expressed are personal.