Second Advance Estimate (AE) lowers FY22 GDP growth to 8.9%

2 Mar 2022 , 09:23 AM

Till date the government has already announced GDP data for the Mar-21, Sep-21 and the Dec-21 quarters. The first advance estimate (AE) released by the National Statistical Office, MOSPI, for FY22 on 07th January had pegged full year GDP growth at 9.2%. That was already 30 bps lower than the RBI estimates of 9.5% at that point of time.

The second advance estimate (AE) released for FY22 on 28th February further scaled down full-year GDP growth by another 30 bps to 8.9%, largely on account of the Omicron variant. However, the full impact on GDP of higher crude prices, the war in Ukraine and hawkish Fed policies will only be known when actual GDP for FY22 is released on 31st May.

Data Source: MOSPI

Remember, this is the fine-tuned data as of the end of February so it does partially capture data points like higher inflation and higher crude prices. However, since interest rate hawkishness and geopolitical uncertainty are still work in progress, their full impact is not yet evident. In fact, MOSPI has warned of negative surprises in the fourth quarter.

How are GDP and GVA likely to pan out in FY22?

In the last few years, it must be mentioned, that the gross value added (GVA) has emerged as a veritable alternative to GDP to gauge the actual output growth. GVA is the GDP shorn of the impact of indirect taxes and subsidies. Let us look at GDP and GVA growth projected for FY22 over FY21 and FY20.

Let us look at GVA first. GVA for FY22 is estimated to grow 8.3% yoy over FY21 to Rs136.25 trillion. However, the 8.3% yoy growth can be misleading due to the base effect as FY21 was an exceptionally weak year due to the pandemic. Instead, if we compare the FY22 projected GVA to the FY20 GVA of Rs132.20 trillion, the GVA is actually 3.07% higher compared to the pre-COVID levels of GVA. This is the second consecutive signal of waning pandemic effect.

Now for GDP! The GDP for FY22 is estimated to grow 8.9% yoy over FY21 to Rs147.72 trillion. However, this 8.9% yoy growth can be misleading due to the base effect as FY21 was a pandemic year. If we compare the FY22 projected GDP to the FY20 GDP of Rs145.16 trillion, then GDP is 1.76% higher compared to the pre-COVID levels.

What are the lead indicators driving this 2-year GDP growth?

What are the components of GDP and how they triggered the growth of GDP to Rs147.72 trillion in FY22 as per second AE. In all cases, we will look at FY22 over FY20 to neutralize the pandemic effect.

a) Let us first look at private final consumption. It has risen from Rs82.60 trillion in FY20 to Rs83.56 trillion in FY22. That is positive growth of +1.16%. Private consumption has bounced over the pre-COVID levels and that is one big positive takeaway of AE2.

b) Government consumption expenditure has moved from Rs14.84 trillion in FY20 to Rs16.12 trillion in FY22. That is positive growth of +8.59%. Government initiated spending has been a key factor in driving GDP growth in FY22 even as per AE2.

c) Gross Fixed Capital Formation has moved from Rs46.11 trillion in FY20 to Rs47.33 trillion in FY22. That is positive growth of +2.64%. Capital formation has picked up from the pre-COVID levels, although it is still relatively insignificant to catalyse the capital cycle.

d) The head of VALUABLES has moved from Rs1.65 trillion in FY20 to Rs3.39 trillion in FY22. That is positive growth of 106.1%. It is indicative of people diverting a lot of spending into idle assets like gold and jewellery; which may be safe havens, but hardly productive.

e) Merchandise Exports increased from Rs28.14 trillion in FY20 to Rs30.92 trillion in FY22. That is positive growth of +9.88%. Exports as a sub-set of trade has been a critical driver of GDP in FY22, although its momentum is slowing gradually.

f) Merchandise Imports has surged from Rs33.22 trillion in FY20 to Rs37.18 trillion in FY22. That is positive growth of +11.94%. Imports must be correlated with the rise in valuables. A chunk of trade deficit was triggered by record gold imports in FY22 till date.

Let us sum up the story of key lead indicators. The good news is that since the first advance estimates, the private consumption has shown a sharp turnaround while government spending has lagged, largely due to budgetary constraints. While trade is a major driver, the two factors to watch out for are the rising trade deficit and the spike in gold imports.

Finally, a likely sectoral GDP story for FY22

The second advance estimates (AE) pegged GVA growth at 8.3% and the GDP growth at 8.9% for FY22. Here is a quick look at how the GVA growth (net of taxes and subsidies) is likely to pan out in FY22.

Industry Segment	FY22 GVA (INR)	FY22 over FY21	FY22 over FY20
Agriculture, Forestry	Rs21.15 trillion	3.3%	6.7%
Mining, Quarrying	Rs3.31 trillion	12.6%	2.9%
Manufacturing	Rs24.83 trillion	10.5%	9.8%
Power, Gas, Water	Rs3.12 trillion	7.8%	3.9%
Construction	Rs10.59 trillion	10.0%	1.9%
Trade, Hotels, Transport	Rs23.98 trillion	11.6%	-10.9%
Financial, Realty	Rs30.90 trillion	4.3%	6.6%
Public admin, Defence	Rs18.37 trillion	12.5%	6.4%

Data Source: MOSPI

The second AE is the last advance estimate before the actual GDP numbers for FY22 are announced on 31st May 2022. For now, the good news is that manufacturing is well above the pre-COVID levels and the financial services have shown tremendous traction, basis the revised numbers. The only sector that is below pre-COVID levels as per AE2 is the trade and hotels segment which is -10.9% lower than FY20 levels. That is along expected lines and should return to normalcy once the contact-intensive constraints reduce.

On a ceteris paribus basis, the data looks to be on track, with a small dent due to Omicron. However, what is not yet factored in is the impact of higher interest rates, steeply higher crude oil prices and supply chain constraints caused by the ongoing geopolitical tensions. How much of eventual impact that will have, remains the billion dollar question!