While agricultural output continues to be robust like the previous two quarters, industrial output showed traction but services are still struggling. In most cases, the lag effect of the pandemic continues and that is a challenge since services have the highest weightage in the GDP basket. Incidentally, the full year GDP for FY21, which had been projected at -7.7% contraction, has now been scaled lower to contract at -8%. Also, one perspective is that the 0.4% growth may be optical as it is driven by lower GDP growth in Q3-FY19
Good news on the absolute GDP front
Normally, when the GDP numbers are announced, the focus is on GDP growth rather than absolute numbers. But it is the absolute numbers that give the real picture of the strain in the economy.
- In the Jun-20 quarter, the absolute GDP contracted by Rs8.45 trillion, which is a huge loss in terms of output, jobs and solvency of corporates.
- In the Sep-20 quarter, the absolute GDP had contracted by Rs2.70 trillion on a yoy basis. In short, Jun-20 and Sep-20 quarters, the total loss of GDP in absolute terms was Rs11.15 trillion. That is a lot of absolute output lost.
- In comparison, in the Dec-20 quarter, the absolute accretion to the GDP is just Rs0.14 trillion. We are still a long away from covering the absolute GDP loss of Rs11.15 trillion and only after that the accretion to GDP will start. One must not lose sight of this view.
|Economic Sector||Q1 GVA Growth||Q2 GVA Growth||Q3 GVA Growth|
|Mining & Quarrying||-18.0%||-7.6%||-5.9%|
|Financial / Realty||-5.4%||-9.5%||+6.6%|
|Public Admin / Defence||-9.7%||-9.3%||-1.5%|
It was the farmers who saved the day in Q1 and Q2. The situation improved in Q3 with 5 out of the 8 sectors giving positive growth compared to just 2 in Sep-20 quarter and 1 in Jun-20 quarter. Here, we have used Gross Value Added or GVA; i.e., GDP excluding impact of tax and subsidies.
- It is not just Kharif but even Rabi crop has been robust and that is evident from the fact that the agricultural sector recorded its best growth of 3.9% in the Dec-20 quarter. With data points still coming in, there could be upgrades to this figure.
- Manufacturing is hinting at factories and offices getting back to normalcy after it had dipped -35.9% in the Jun-20 quarter. In Dec-20, the growth in manufacturing stands at a more robust +1.6%.
- While services continued to drag in specific pockets, let us look at some of the positive stories in the services space. For example, utility services turned from -9.9% in Jun-20 quarter to +7.3% in the Dec-20 quarter. This is due to most of the key utility services resuming normal operations and supply chain constraints being taken care of. Even construction, financial services and realty services have seen a shift to positive growth. That is encouraging stuff on the services front.
- However, pain points remain. Trade, hotels and media continue to show negative growth. Hotels and tourism are still to recover from the lag effect of the pandemic and reduced travel is likely to have a long-term impact. Also, public administration and defence services have seen negative growth and that could be more due to budget constraints with the government already running a fiscal deficit of 9.5% of GDP.
Government and RBI may be constrained by the levers
Can the government really use fiscal and monetary levers to boost GDP growth?
- With fiscal deficit at 9.5% of GDP in FY21 and 6.8% in FY22, the leeway for any further fiscal thrust is limited. The government will resort to more facilitative measures like the PLI schemes and the onus will be on industry to boost GDP growth.
- Even on the monetary front, the levers are fairly limited. With repo rates at 4%, the US hinting at rate hikes and bond yields spurting, there is not much of monetary room available. Inflation may have come down but core inflation remains an issue.