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India GDP: Marathon effort ahead

India’s Q4FY21 GDP at 1.6% YoY was positive for the 2nd consecutive quarter, GVA grew by 3.7% YoY. While manufacturing and construction activities led the spurt on the production side, government’s consumption expenditure and net investments supported growth from the expenditure side. Incorporating today’s print, FY21 real GDP and GVA growth are respectively at -7.3% and -6.2%. While all indications pointed to a stable recovery process before the 2nd wave struck, this is now likely to be pushed back to an extent. For FY22 we expect real GDP growth at 8.5%, weaker than our previous estimate of 10.5%.

Q4FY21 GVA improvement primarily led by Industry segment: Q4 FY21 GVA expanded by 3.7% YoY vs. 1.0% in Q3 FY21. Improvement was broad-based with positive growth recorded in industry, agriculture and services sector. Industry GVA grew by 7.9% YoY in Q4 from 2.9% in Q3, led by growth in value added components of construction (14.5% YoY) followed by electricity (9.1% YoY) and manufacturing (6.9% YoY). However, mining continued to contract (-5.7% YoY) for the eighth consecutive quarter. Agriculture expanded at a slower pace of 3.1% in Q4FY21 vs. 4.5% in Q3FY21. Nevertheless, overall growth in agriculture sector for FY21 is in line with a strong increase in food grain production (as per the 2nd advance estimate) by 2.0% (303.3 mn tonnes in FY21 vs. 297.5 mn in FY20) over the previous year

After a hiatus of three quarters, services GVA grew by 1.5% YoY in Q4FY21 vs. -1.2% in Q3FY21. Expectedly, services related to trade, hotels, transport and communication continued to contract, albeit at a slower rate (-2.3% YoY). On the other hand, public admin and defence spending (2.3% YoY) along with finance, real estate and professional services (5.4% YoY) expanded. The expansion in public services was expected as Central Government revenue expenditure ex. interest payments increased by a massive 193.1% in Q4FY21 from an expansion of ~23.0% in Q3FY21.

Increase in government expenditure and net investment aid Q4 FY21 GDP recovery: On the demand side, the improvement in Q4FY21 GDP growth to 1.6% YoY vs. +0.5% growth in Q3FY21 was supported by government consumption and net investments. Robust improvement in government expenditure (28.3% YoY) can be attributed to sharp increase in capex spending by both central and state government during the quarter. Gross fixed capital formation (GFCF) grew by a sharp 10.9% YoY in Q4 FY21 from 2.6% in Q3, with its share in overall GDP increasing to 34.3%. Notably, build-up in inventories also continued to increase for the third consecutive quarter with demand gradually inching towards preCOVID levels in the last quarter of FY21.

On the other hand, domestic private consumption expanded for the first time in FY21 by 2.7% YoY in Q4FY21 from -2.8% in Q3FY21. However, its share in GDP dropped to 55.4% from 58.3%. Meanwhile, net trade remained a drag on overall growth recovery, declining by 3.5% YoY in Q4FY21 vs. +1.5% in Q3FY21.

Growth recovery to be pushed back due to COVID 2 nd wave: The implementation of lockdown like restrictions due to the 2nd wave will likely create a break in the normalisation process in the growth that had started as the economy was unlocked after the tapering off of the 1st round of infections. The mobility and consumption indicators have already started recording a sequential drop with state level lockdown restrictions through April and May. Other high frequency indicators such as automobile sales and production, PMI manufacturing and PMI services, E-way bills, power consumption etc. have also moderated sequentially. While the recent decline in the number of daily COVID cases has been encouraging, states are expected to remain cautious and likely to extend lockdown restrictions until at least mid/end June, thereby further deferring consumption recovery

Speedy vaccination of the population is probably the only way that might enable a bounce back in consumer sentiments. We remain hopeful that starting June supplies will turn out to be better with domestic production as well as imports of vaccines being ramped up. Overall, we expect GDP growth in FY22 to be at 8.5% with risks balanced on either sides

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