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There is more than just optics of base effects

* Optically robust Q1FY22 GDP growth of 20.1% (GVA growth 18.8%) was driven by pandemicinduced low base effects. It also indicated lower-than-initially-expected economic losses due to the second Covid wave. The yawning gap between GDP and GVA growth seen in FY21 has finally reversed, helped by robust net taxes in Q1.

* The supply side depicted Q1FY22 growth was led by manufacturing and construction. Services remained a laggard as contact-sensitive sectors bore the brunt of localized lockdowns. Financial and real estate improved sequentially. The expenditure side reflected healthy private consumption and solid fixed capital formation at 55.3%.

* We raise FY22E growth by 110bps to 10.1%, given limited economic losses so far. We reckon that factors such as better-adapted firms, stable financial conditions and robust global growth spillovers created growth buffers back home and that H2FY22 should see recovery pacing again. However, in our view, the sustainability of that recovery should be monitored, especially as it may partly be led by capital and profits, and may have traces of a scarred and segmented labor market.

* Optimal execution of public physical and social infra outlays will be the key. It will have a large multiplier effect on jobs at the bottom of the income pyramid and on private investment. This, complemented by initiatives like privatization/asset monetization, tax reforms and expenditure realignment, will likely create fiscal space to fund public investment.

Q1FY22 GDP growth propped by base effect but still has silver linings

GDP expanded by a material 20.1% YoY in Q1FY22 (Emkay: 21.3%, Consensus: 21%) and Real GVA growth at 18.8% (Emkay: 19.2%, Consensus: 19.6%), driven by pandemic-induced low base effects. It also indicated lower-than-initially-expected economic losses due to the second Covid wave.

Most leading indicators and robust corporate results hinted at a decent annualized gain in growth momentum, while the sharp sequential contraction in GVA (-13% QoQ, nsa) likely reflected the impact of localized restrictions due to the second wave. Nominal GDP growth was 31.7%. On the back of robust net taxes in Q1FY22, the yawning gap between GDP and GVA growth seen in FY21 has finally reversed.

Supply side shows across-the-board improvement in Q1FY22 with positive growth in services

The pickup in Q1 GVA growth was mainly led by robust manufacturing (49.6%) and construction (68.3%), which was largely a global phenomenon as well. Services remained a laggard, bearing the brunt of Covid. Utility demand remained strong (14.3%) as power consumption rose above pre-pandemic levels, while fuel consumption improved. Within services, financial and real estate grew 3.7%, while public admin service (part proxy for government spending) improved 5.8% yoy but contracted sequentially amid slower government revex.

Trade, hotel and T&C also improved to 34.3% but saw the maximum negative sequential impact amid restricted mobility. Private sector GVA growth made impressive gains of 25.2% (4.1% prior). The Agri sector continued to support the economy, growing 4.5% (3.1% prior).

Expenditure side reflects private consumption remains the key contributor

By expenditure, private consumption remained a key contributor, growing 19.3%, contributing ~10.7pp. While Government consumption contracted by 4.8%, possibly due to lower public spending. Government spending this year would likely be in the form of transfer/subsidy payments, with no material contribution to GDP.

Meanwhile, GFCF was robust at 55.3%. However, valuables rose exorbitantly by 456%, partly reflecting some adjustment in capital formation while estimating quarterly GDP. Net exports drag came down sequentially as exports grew more than imports.

Raising FY22 growth further by 110bps to 10.1%

Clearly, factors such as better adapted firms and policy response, stable financial conditions and robust global growth spillovers have created growth buffers back home. The catch-up in the vaccine drive will increase mobility ahead and aid the pick-up in the contact-sensitive services sector. We raise our FY22 GDP growth estimate to 10.1%, but it may still be around 5-6% lower than the pre-pandemic expected growth path.

We reckon that the nascent recovery ahead may partly still be led by capital and profits and may have traces of a scarred and segmented labor market and sub-optimal effective fiscal policy stimulus. However, exogenous demand drivers in the form of exports and sustained government capex will need to create a growth bridge till private investment and consumption recover optimally.

To policymakers’ credit, a public investment push appears key to their growth revival strategy. Policy support in the form of physical and social infra outlays will have a large multiplier effect on jobs (even at the bottom of the economic pyramid) and will eventually catalyze private investment. This, in conjunction with initiatives like privatization, tax reforms and expenditure realignment, will likely create fiscal space to fund public investment.

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