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India GDP

Growth reverts to positive territory

* Q3FY21 GDP growth came in less robust than our expectations at 0.4% (Consensus: 0.6%, Emkay: 2.0%) even as real GVA growth stood at 1.0%. This implies that higher subsidies payout impinged on net indirect taxes growth – the adjustment factor between GDP and GVA. The supply side depicted that Q3FY21 growth was led by agriculture and manufacturing. Public admin and other services (part proxy for government spending) remained in the contractionary mode at -1.5%. The expenditure side reflected fixed capital formation turning positive at 2.6%, possibly led by public investment.

* Amid a series of revisions in past quarters since FY18, CSO’s FY21 second estimates for GDP and GVA growth now stand at -8.0% (-7.7% earlier) and -6.5% (-7.2% earlier), respectively. Accordingly, the implied real GDP/GVA growth for Q4FY21, as per CSO, will likely be - 1.1%/+2.5%.

* We expect the sequential momentum to continue, with services and public spending being the frontrunners. We maintain FY21 GVA/GDP growth at -6.0%/-7.1%, with a mild downward bias for the GDP print amid higher subsidies payout. The continuation of growth momentum, nonetheless, should help FY22 GDP growth to move toward 10.5%. However, we reckon that the sustainability of the same needs to be monitored, especially as the recovery appears to be led by capital and profits, and not necessarily improvement in labor markets and wage growth.

Q3FY21 GDP growth back in positive territory, albeit still short of expectations

After deep contractions in previous two quarters, GDP growth returned to the positive territory at 0.4% in Q3FY21, albeit printing lower than expectations (Consensus: 0.6%, Emkay: 2.0%). Real GVA growth came in at 1% (-7.3% in Q2FY21), while the nominal GDP growth stood at 5.3% (-4.2% prior). While most leading indicators were hinting at a decent gain in growth momentum, the uptick was still much lower than envisaged. After a series of revisions in the past quarters, the CSO’s FY21 second estimates for real GDP and real GVA are revised to -8.0% (-7.7% earlier) and -6.5% (-7.2% earlier), respectively. While we understand that the subsidies would be much higher than taxes in FY21, especially on account of higher arrears this year, the gap between GDP and GVA growth looks too wide. We think that this gap may narrow down in Q4FY21 and may reverse sharply in FY22 as growth in net taxes likely outdo that of subsides.

Supply side shows across-the-board improvement in Q3FY21 but services growth still negative

The pickup in Q3 GVA growth was largely driven by continued robust momentum in agriculture (3.9%) and further improvement in manufacturing and mining, with construction and services also showing significant improvement. Within services, trade and transport and financial services remained laggards despite improving domestic mobility. The public admin and other services (part proxy for government spending) remained in the contractionary mode (-1.5%) despite the central government’s robust revenue expenditure, partly reflecting weak performance of other services. Private sector GVA growth, however, is back in the mild positive at 0.7% after 8.5% contraction earlier.

Expenditure side reflects capital formation turning positive

In terms of expenditure, growth momentum was positive only for GFCF at 2.6%, possibly led by high public investment spending. Private/government consumption remained in negative at -2.4%/-1.1%, but improved substantially from -11.3%/-24.0% in Q2FY21. Net exports were a mild drag on growth. Overall, private consumption may lead the recovery process, aided by high public capex spending ahead.

Lower net taxes may put downward pressure on our

FY21 estimate of -7.1% While Q3FY21 GVA growth was lower, we expect the recovery momentum to continue in Q4. The services sector, which has been a laggard so far, may lead the sequential traction in the coming months. Besides, amid improving revenue kitty, higher general government spending should augur well for coming quarters. We maintain FY21 GVA and GDP growth at -6.0% and -7.1%, respectively, with a mild downward bias. The continuation of momentum should help FY22 GDP growth to move toward 10.5%. However, we reckon that the sustainability needs to be monitored, especially as the recovery appears to be led by capital and profits, and not improvement in labor and wages. The nascent and patchy K-shaped growth recovery post Covid-19 comes with a potentially scarring and divided labor market. Besides, the effective fiscal policy stimulus remains sub-optimal. Thus, sustaining sequential growth momentum beyond that will require an easing in the domestic structural overhang and a better global backdrop.

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