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The worst is already behind us

Expect ~20% YoY real GDP growth in 1QFY22E

* We had faced certain technical difficulties in estimating our in-house Economic Activity Index (EAI) in Apr’21, and the complications persisted in May’21 as well. Therefore, we continue to analyze the performance of various economic indicators on a MoM basis, even in May’21.

* As the second COVID wave was at its worst in mid-May’21, many states extended localized lockdowns. Data suggests that economic activity in all segments – Farm, Industrial, and Services – contracted at a slower pace in May’21 as compared to Apr’21. While the Farm sector fell 2.5% MoM in May’21 (v/s -11.4% MoM in Apr’21), Industrial activity contracted by 7.9% MoM (v/s -9.6% in Apr’21) and the Services sector fell 10.6% MoM in May’21 (v/s -12.9% in Apr’21).

* On the expenditure side, while private consumption collapsed more than a fourth vis-à-vis a 14% YoY decline in Apr’21, government spending galloped by 34.4% MoM in May’21. Investments, on the other hand, continued to decline in double-digits in May’21 (albeit at a slower pace as compared to Apr’21).

* We also looked at various indicators available on a daily basis to understand the economic situation in Jun’21. Most macroeconomic parameters have fared better in Jun’21 v/s May’21, while very few indicators such as currency in circulation and manufacturing PMI weakened last month.

* This implies that the worst, in terms of economic impact due to the second COVID-wave, is behind us. Economic activity is gradually gathering pace, with the reported number of active COVID-19 cases on a downward trajectory. Accordingly, we leave unchanged our forecast of ~20% YoY growth in real GDP in 1QFY22E.

* Services sector contracts at a slower pace MoM in May’21…: We had explained in our Jun’21 report about the technical difficulties faced in estimating our inhouse EAI in Apr’21. As expected, those difficulties persisted in May’21 as well. Therefore, just like in Apr’21, we have analyzed the performance of various indicators in May’21 also on a MoM basis. As the second COVID wave was at its worst in mid-May’21, many states extended localized lockdowns. However, data suggests that average growth in the Services sector contracted by 10.6% MoM in May’21, slower than a decline of 12.9% MoM in Apr’21.

* …and so did the Farm and Industrial sector vis-à-vis Apr’21: Similarly, the Farm sector also declined modestly (2.5% MoM) in May’21, as against a decline of 11.4% MoM in Apr’21 and the Industrial sector too shrank 7.9% MoM in May’21, slower than the fall of 9.6% MoM in Apr’21.

* Private consumption collapsed faster, but investments fell slowly in May’21: Our estimate of private consumption suggests that it fell sharply (26.9% MoM) in May’21 as against a decline of 14.4% MoM in Apr’21. In contrast, government consumption grew strongly in May’21 and total investments continued to decline for the second consecutive month at 14.3% MoM in May’21 as compared to a fall of 17.4% MoM in Apr’21.

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