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Economic recovery loses sheen in Dec’20…

…expect real GDP change between -1% and +1% YoY seen in 3QFY21

* Our in-house Economic Activity Index (EAI) for India’s real gross value added (GVA; called EAI-GVA) posted slower growth of 3.9% YoY in Dec’20, v/s 5.1%/6.3% YoY growth in Nov’20/Oct’20. Consequently, EAI-GVA grew 5.1% YoY in 3QFY21 after two consecutive declines of 17.6% and 2.1% YoY in 1QFY21 and 2QFY21, respectively. Slower growth in Dec’20 was due to moderation in the Services and Farm sectors, while industrial activity appears to have performed relatively better.

* The EAI-GDP index (our in-house measure for official GDP) declined at the slowest pace in 10 months – by 3.8% YoY in Dec’20 v/s a 5.8% YoY contraction in Nov – implying EAI-GDP decline of 6% YoY in 3QFY21 (v/s decline of 11.5% YoY in 2QFY21). Excluding fiscal spending, which grew 29.2% YoY in Dec’20, EAI-GDP declined 5% YoY during the month, marking its slowest fall in 10 months. Following a 10-month long streak of contractions, investments grew a marginal 0.5% YoY in Dec’20, led by strong government capex and cargo traffic. IIP for capital goods is also expected to have grown 13.1% YoY in Dec’20.

* Overall, economic recovery was much better during Oct–Nov’20 v/s Dec’20. This may be due to the tapering of pent-up festive demand from previous months. Accordingly, we believe real GDP growth could be between -1% and +1% YoY in 3QFY21, before higher growth is seen in 4QFY21. Additionally, early indicators such as power generation growth and PMI indices show marginally better growth for Jan’21. In any case, now that the mass rollout of COVID-19 vaccines is imminent, it is only a matter of time before we witness the complete normalization of economic activity.

* EAI-GVA grew 3.9% YoY in Dec’20: Preliminary estimates reveal India’s EAI posted slower growth of 3.9% YoY in Dec’20 v/s 5.1% YoY and 6.3% YoY growth in Nov’20 and Oct’20, respectively (Exhibit 1). Consequently, EAI-GVA is expected to rebound further – with growth of 5.1% YoY in 3QFY21 after two consecutive declines of 17.6% and 2.1% YoY in 1QFY21 and 2QFY21, respectively. Slower growth in Dec’20 was due to moderation in the Services and Farm sectors, while industrial activity appears to have performed relatively better (Exhibit 2).

* EAI-GDP, however, continued to decline: The EAI-GDP declined at the slowest pace in 10 months by 3.8% YoY in Dec’20 v/s a contraction of 5.8% YoY in Nov’20 (Exhibits 3, 4). This implies EAI-GDP declined much slower at 6% YoY in 3QFY21 v/s decline of 11.5% YoY in 2QFY21. Excluding fiscal spending, however, EAI-GDP declined 5% YoY in Dec’20 (the slowest decline in 10 months) v/s 7.5% YoY in Nov’20.

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