The National Statistical Office, MOSPI, released the first advanced estimates of GDP growth for the financial year 2020-21. As of date, the MOSPI has only announced actual GDP growth numbers for the Jun-20 and Sep-20 quarter. The GDP growth for Dec-20 quarter will be announced on 26-Feb. While MOSPI continues to maintain its projection of negative GDP growth in FY21, the extent of contraction has come down.
Just a couple of months back, most estimates including the RBI estimates pegged GDP contraction for FY21 at -10% to -11%. However, better than expected performance by the economy in the last few months and the bounce in corporate performance led the MOSPI to upgrade its GDP estimate to -7.7%. In a nutshell; contraction it will be, but it will not be as bad as originally anticipated.
MOSPI pegs FY21 GDP advance estimate at -7.7%?
What does Advance Estimate of -7.7% for GDP mean. It means that the year will still see contraction in GDP, but not be as bad as originally anticipated. In fact, the GVA (excluding impact of taxes and subsidies) will contract only by -7.2% for the full year. The big question is how realistic is the figure.
If you look at the first half of FY21; GDP contracted by -23.9% in Jun-20 quarter and by -7.3% in Sep-20 quarter. That approximately adds up to a contraction of about 15.6% in the first half of the current fiscal year. If the MOSPI is projecting -7.7% for the full year, then we are talking about almost flat growth in GDP in the third and fourth quarters.
Anything better than -7.7% would be icing on the cake for full year GDP numbers. However, it does appear that after a gap of almost 41 years, India may once again see contraction in GDP. Such a situation was last seen in fiscal year 1979-80 during the highly unstable Janata Party government.
Highlights of the GDP advance estimates for FY21
The key highlights of the GDP advance estimates put out by the National Statistical Office (NSO) of MOSPI can be summarized asunder.
• GDP for FY21 is estimated at Rs134.40 trillion compared to Rs145.66 trillion in FY20. That is contraction of -7.7% but more importantly, the GDP in dollar terms dips decisively below the $2 trillion mark.
• Gross value added or GVA, which is GDP excluding impact of taxes and subsidies, is expected to fall -7.2% in FY21 to Rs123.39 trillion compared to Rs133.01 trillion last year.
• The nominal GDP (gross of inflation) for FY21 is estimated at Rs194.82 trillion, a contraction of -4.2%. Normally, growing economies like India typically need nominal GDP growth levels of around 10% to pull more people into the consuming class.
• The NSO has pointed out that an early vaccine solution to the pandemic could lead to rapid pick-up in growth and greater willingness to spend. This could result in growth surprising on the positive side.
• The per capita GDP is expected to fall by 8-10% during the year due to a sharp fall in GDP as well as a spike in population. This is not great news because per capita GDP in India is already way below Asian, Latin American and East European standards.
Farmers likely to rescue economic growth in FY21
Here are key takeaways from the break-up of the advance estimates of FY21 GDP.
a) In line with the trend in the first two quarters, agriculture is the key sector with growth of +3.4% in FY21. This is likely to be led by a strong Kharif and Rabi output this year. In addition, higher levels of farm incomes also resulted in better performance by the agriculture / fishing sector.
b) The other segment projected to show positive growth in FY21 is the supply of utility services like electricity, water supply etc. This is largely non-cyclical and likely to benefit from the revival in coming months.
c) There is hardly any surprise that hotels, trade and transport at -21.4% contraction is likely to be the worst hit in FY21. Prolonged shutdown in hotels, restaurants, malls and shopping centres has taken its toll and the lag effect is likely to stay.
d) Two other sectors likely to contract more than 12% are mining and construction. Mining demand is derived industrial demand and slack capacities are a major issue. The combination of weak demand and WFH is likely to keep construction on tenterhooks.
e) Finally, manufacturing is likely to be a major disappointment at -9.4%. However, high frequency data points like core sector and PMI numbers are showing traction. If things go well, manufacturing could do better that expected.
A lot will depend on how the Indian economy reacts in the third and fourth quarters. But, there is an interesting takeaway for stock markets. With BSE market cap touching Rs196 trillion, the MCAP/Real GDP ratio stands at 145%; one of the highest in market memory.