Q1 GDP up 20.1% but trade was the real big story

For FY21, India’s GDP had contracted by -7.3%, which was better than the RBI estimates of -7.5% to -8.0% contraction. Let us first look at GDP at a macro level.

Sep 01, 2021 02:09 IST India Infoline News Service

After 2 quarters of negative GDP growth in Jun-20 and Sep-20 quarters, GDP growth turned around to positive territory. From 0.4% in the Dec-20 quarter to 1.6% in the Mar-21 quarter to 20.1% in the Jun-21 quarter, GDP is showing signs of recovery. However, while the recovery looks optically alluring due to low-base effect, the growth over 2019 is still trailing. For example, while real GDP for the Jun-21 quarter is up 20.1% over last year, it is still -8.6% below the levels of GDP achieved in the Jun-19 quarter; way short of pre-COVID levels.
Data Source: NSO (MOSPI)
For FY21, India’s GDP had contracted by -7.3%, which was better than the RBI estimates of -7.5% to -8.0% contraction. Let us first look at GDP at a macro level.

Inflation plays spoilsport with macro level GDP growth

Let us look at real GDP and nominal GDP. Real GDP is Nominal GDP adjusted for inflation. Normally, real GDP is considered the benchmark and when we talk of 20.1% growth in GDP, we are referring to real GDP and not nominal GDP. However, nominal GDP shows the extent of economic activity in absolute terms and also shows the potential of the economy to create jobs. Here is how these numbers panned out for the Jun-21 quarter.

Real GDP for the Jun-21 quarter stood at Rs32.38 trillion compared to Rs26.95 trillion in the Jun-20 quarter, representing quarterly GDP growth of 20.1%. However, in the Jun-20 quarter, the GDP had contracted by -24.4% due to the impact of COVID. Hence if you take the Real GDP for Jun-21 quarter and compare with the Jun-19 quarter, the real GDP of the latest quarter is actually -9.2% lower compared to the real GDP of Jun-19 quarter. Let us also look at the nominal GDP picture.

Nominal GDP for the Jun-21 quarter stood at Rs51.23 trillion compared to Rs38.89 trillion in the Jun-20 quarter, representing nominal GDP growth of +31.7%. However, in the Jun-20 quarter, the nominal GDP had contracted by -22.3% due to impact of COVID. Hence if you take the Nominal GDP for Jun-21 quarter and compare with the Jun-19 quarter, then the Nominal GDP is ironically higher by +2.3% compared to nominal GDP of Jun-19 quarter.

Why this dichotomy? Why is real GDP sharply lower than 2019 but nominal GDP higher than 2019? The reason is inflation. The last 2 years have been marked by steady inflation in consumer and producer goods. The inflation impact has been so large over the last 2 years that a +2.3% growth in nominal GDP actually transformed into a -9.2% contraction in real GDP. In short, inflation has played spoilsport for real GDP compared to pre-COVID levels.

How did key GVA parameters pan out in Jun-21 quarter?

Instead of GDP, we will look at GVA, which excludes the impact of taxes and subsidies and gives a clearer picture of output. The table is self-explicit.
Sector Jun-21 Q1 over Jun-20 Q1 Jun-21 Q1 over Jun-19 Q1
Agricultural, Forestry, Fishing +4.5% +8.2%
Mining & Quarrying +18.6% -1.80%
Manufacturing +49.6% -4.3%
Power, gas, water supply +14.3% +3.0%
Construction +68.3% -15.0%
Trade. Hotels, Transport +34.3% -30.3%
Financial, Real Estate +3.7% -1.5%
Administration, Defence +5.8% -5.0%

Data Source: NSO (MOSPI)

The second column is a purely base effect. What is more interesting is the third column which shows item-wise comparison of GDP of key segments of activity. The decisive growth over 2019 is only visible in agriculture which is up 8.2% over Jun-19 quarter and has even grown through COVID. Power, gas and water being a utility service is higher by 3% but manufacturing is still -4.3% lower than Jun-19 quarter. The obvious victims are construction, trade, hotels and transport; which are the most contact-sensitive sectors. Overall, the gross value added (GVA) for Jun-21 quarter is down -7.8% compared to Jun-19 quarter. It looks like recouping pre-COVID levels is the first challenge.

Q1 GDP was actually a story of trade boost

If there was one outstanding feature of the Q1 GDP story, it was the frenetic growth in exports and imports. The table below capture the gist.
Principal Indicator Q1 growth over Jun-20 Qtr. Q1 growth over Jun-19 Qtr.
Rice Production +6.4% +16.9%
Cement Production +52.9% -5.7%
Steel Consumption +103.1% +0.3%
Merchandise Exports +49.0% +19.5%
Merchandise Imports +72.8% +4.4%
Data Source: NSO (MOSPI)

The growth in rice production over Q1-2019 is understandable as agriculture did not feel the COVID pangs at all. However, exports and imports fell sharply in 2020 but rebounded sharply to settle well above the 2019 Q1 levels. That is evident if you look at the contribution to GDP.

The contribution of exports to GDP has gone up from 19.2% in the first quarter last year to 21.7% in first quarter of current year. During the same period, the share of imports in GDP is up from 17.3% to 22.7%. In a nutshell, it is the robust bounce in trade in the first quarter that has really made a difference. The export thrust surely seems to be working!

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