SBI Ecowrap - Decoding growth against conflicting signs with Q3FY22 GDP pegged at 5.8%, FY22 GDP at 8.8%

18 Feb 2022 , 10:54 AM

Based on SBI Nowcasting model, the forecasted GDP growth for Q3 FY22 would be 5.8%, with a downward bias. Interestingly, GVA will be higher than GDP because of a distorted base. The full year (FY22) GDP growth is now revised downwards to 8.8% from our earlier estimate of 9.3% factoring the fatigue accruing on account of continued fight against the chimeric virus and the spillover of ripple effects intermingling in somewhat indecipherable ways. With this, the real GDP will be around Rs2.35 lakh crore / 1.6% more than the pre-pandemic FY20 real GDP of Rs145.69 lakh crore.

The good thing though is a part of this growth will be frontloaded into FY23 with SBI GDP forecast at 8%+, higher than RBI and Government estimates at ~7.8% or so. Our ‘Nowcasting Model’ is based on 41 high frequency indicators associated with industry activities, service activities and, global economy. The model uses the dynamic factor model to estimate the common or representative or latent factor of all the 41 high frequency indicators from Q4 of FY13 to Q3 of FY22. This slower growth momentum reconfirms recent assertion that incipient growth recovery needs to be supported by accommodative policy longer than anticipated. We thus expect liquidity normalization may be delayed. This could have a further softening impact on G-sec yields from current 6.7% towards ~6.55% or so. 

Recovery in domestic economic activity is yet to be broad-based, as private consumption remains at below pre-pandemic levels, though February has seen high frequency indicators gaining traction. The high frequency indicators had suggested some weakening of demand in Q3, also continuing to January 2022 reflecting the drag on contact-intensive services.

Rural demand indicators, say two-wheeler and tractor sales, have continued to decline since Aug’21. Amongst the urban demand indicators, consumer durables and passenger vehicle sales contracted in Q3 while domestic air traffic weakened in the wake of Omicron variant spread. Investment activity though, is displaying a traction in pick up, with merchandise exports remaining buoyant.

Globally, recovery across geographies seems to be taking divergent pathways, with a downward spiral in select powerhouses as the average real GDP y-o-y growth in Q4 for 28 economies at 4.5%, though same as it was in Q3, saw GDP growth for certain major economies witnessing deceleration in Q4. China’s economy grew at the slowest pace in 1-1/2 years (@4%) in Q4, dragged by weaker demand due to property market meltdowns, curbs on debt and stricter COVID-19 measures. UK’s GDP growth decelerated from 7.0% in Q3 to 6.5% in Q4. The German economy, Europe’s largest economy, decelerated to 1.7% in Q4 as microchip shortages hit production in the car industry and COVID-19 restrictions further slowed down the recovery. The silver lining has been the growth in USA, backed by a resurgent job market though unbridled inflation lurks round the corner to derail the story.

The decline in growth of real rural wages since FY17 is a concern particularly in the pandemic era accentuated by tepid growth in nominal wages (from Rs298 per day in FY17 to Rs364 per day in FY22). After two years, the terms of trade in agriculture have once again gone against farming due to high inflation, notwithstanding projected growth in farm sector at a robust 3.9% in FY22. Further, as per our estimate, the per capita agricultural GDP (in current prices) was around Rs55,000 while Non Agriculture per capita GDP was Rs2,20,000 in FY21.

A closer look at the quarterly ASCBs data from RBI in recent past, coupled with our internal market trends analysis and dissection of quarterly results released by banks foretells the asymmetrical growth in deposit accretion across various geo-population groups as the lingering pandemic appears to be taking a toll on the nascently recovering rural economy with a strong likelihood of subdued sequential deposit growth in Q3 at rural centres.

Even the metro regions, with largest chunk of deposit base, are expected to show lesser growth in the preceding quarter though here the reasons could be more affiliated to allocation towards capital markets/ other assets classes by domestic investors who have of late anchored the buying on dips prophecy as FIIs press sell button.

Government can offer livelihood loans, say up to Rs50,000 to rural poor to tide over the predicament. This loan may be given on the premise that interest-servicing alone will keep the loan standard with subsequent loan renewal linked to successful repayment record. If Government were to bear, say, 3% interest subsidy, on a portfolio of Rs50,000 crore, the outlay would be only Rs1500 crore during 2022-23. And these loans will also act as a big consumption booster at subsistent levels. The additional advantage of these micro livelihood loans is that they will help the banking system prepare a comprehensive database and credit history of marginal borrowers that can be further leveraged to create new credit-worthy borrowing classes.

The present overdraft facility for PMJDY accounts in banking system, in existence for some time can be streamlined and tech enriched with a central nodal agency/bank to monitor and promote the scheme meaningfully. Given the significant success of vaccination in third wave in rural pockets, the livelihood loans can be the silver bullet catapulting the broader economy to unprecedented highs.

The author of this article is Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com