Q4 GDP tapers to 4.1%, but FY22 GDP holds 8.7% growth

1 Jun 2022 , 12:26 PM

There has been a gradual toning down of the GDP figures over the last few months. In its December 2021 monetary policy, the RBI had pegged full year GDP growth for FY22 at 9.5%. The first advance estimates of full year GDP growth in January 2022 had pegged the full year GDP growth 30 bps lower at 9.2%. However, in the second advance estimate in February, the full year GDP growth was further toned down to 8.9%.

The actual GDP data released for the full year FY22 on 31st May, pegged GDP growth at 8.7%. That is 20 bps lower than the second advance estimates but it is understandable amidst the flux that the global economy is in. Inflation is rampant, commodity prices have shot up, supply chain constraints are still intense and central banks are hawkish. Amidst this chaos, the full year GDP at 8.7% is surely something to savour.

Data Source: MOSPI

However, more important is the fourth quarter GDP growth. The Reuters poll had pegged GDP estimates for the fourth quarter in the range of 2.7% to 5.5%, while SBI had pegged the Q4FY22 GDP growth at below 3%. In that background, the Q4FY22 GDP growth at 4.1% is comforting, more so, since it comes on a previous year base of 2.5% growth.

How did the GDP and GVA pan out in FY22?

In the last few years, the gross value added (GVA) has emerged as a solid alternative to GDP to gauge the actual output growth. What do we understand by GVA? Now, GVA is the GDP shorn of the impact of indirect taxes and subsidies. Let us look at GDP and GVA growth estimated for FY22 over FY21 and FY20.

Let us look at GVA first. GVA for FY22 is estimated to have grown at 8.1% yoy over FY21 to Rs136.05 trillion. However, the 8.1% yoy growth can be rather illusory due to the base effect as FY21 was an exceptionally weak year on account of the pandemic. A better way would be to compare the FY22 estimated GVA to the FY20 GVA of Rs132.19 trillion. Over the pre-pandemic period, the GVA is actually 2.92% higher for FY22. Remember, this is a more credible data point as it is pure output, excluding impact of indirect taxes and subsidies.

Let us also look at how GDP panned out!The GDP for FY22 is estimated to have grown 8.7% yoy over FY21 to Rs147.36 trillion. However, this 8.7% yoy growth can be misleading due to the base effect as FY21 was COVID year. If we compare FY22 estimated GDP to the FY20 GDP of Rs145.16 trillion, then GDP is 1.51% over pre-COVID levels. It has fallen slightly.

What were the major drivers of Nominal GDP in FY22

Nominal GDP is the GDP before adjusting for inflation. Nominal GDP actually shows the level of economic activity and creation of jobs, which is why it matters. Of course, the GDP used in common parlance is always real GDP, but nominal GDP has some analytical importance. For FY22, the nominal GDP was Rs236.65 trillion, which is a yoy growth of 19.5%. On a pre-COVID basis, nominal GDP grew 17.9%. Here are the key drivers.

1. Let us first look at private final consumption. It has risenfrom Rs122.37trillion in FY20 to Rs140.96 trillion in FY22. That is positive growth of +15.19%. Private consumption has bounced over the pre-COVID levels and that is a sign of consumers coming back.
2. Government consumption expenditure has moved from Rs22.01trillion in FY20 to Rs26.34 trillion in FY22. That is positive growth of +19.7%. Government initiated spending has been a key trigger that has driven growth in last 2 years.
3. Gross Fixed Capital Formation has moved from Rs57.38trillion in FY20 to Rs67.60 trillion in FY22. That is positive growth of +17.81%. Capital formation has picked up from the pre-COVID levels, and that is visible in aggressive corporate capital outlays.
4. The head of VALUABLES has moved from Rs1.95trillion in FY20 to Rs4.02 trillion in FY22. That is positive growth of 106.3%. This is not great news as it shows diverting spending into idle assets like gold and jewellery; which are safe havens, but zero productive.
5. Merchandise Exports increased from Rs37.52trillion in FY20 to Rs50.64 trillion in FY22. That is positive growth of +34.96%. One of the key factors driving post-COVID recovery has been exports and that is visible in the GDP numbers.
6. Merchandise Imports has surged from Rs42.70trillion in FY20 to Rs56.54 trillion in FY22. That is positive growth of +32.4%. Imports must be correlated with the rise in valuables.A chunk of trade deficit was triggered by record gold imports in FY22.

Here are the key takeaways. Private consumption has shown a sharp turnaround while government spending has also picked up over FY20. While trade is a major driver, the two constraints to watch out are rising trade deficit and the spike in gold imports.

What were the sectoral drivers of GVA for FY22?

Compared to the second advance estimates, the GVA growth for FY22 has toned down further from 8.3% to 8.1%. Let us take a quick peak into how the GVA growth (net of taxes and subsidies) has panned out in FY22.

Industry Segment	FY22 GVA (INR)	FY22 over FY21	FY22 over FY20
Agriculture, Forestry	Rs21.10 trillion	3.0%	6.4%
Mining, Quarrying	Rs3.28 trillion	11.5%	1.9%
Manufacturing	Rs24.71 trillion	9.9%	9.2%
Power, Gas, Water	Rs3.12 trillion	7.5%	3.6%
Construction	Rs10.74 trillion	11.5%	3.4%
Trade, Hotels, Transport	Rs23.86 trillion	11.1%	-11.3%
Financial, Realty	Rs30.87 trillion	4.2%	6.5%
Public admin, Defence	Rs18.39 trillion	12.6%	6.4%

Data Source: MOSPI

There are some broad trends that are emerging here. Compared to the second advance estimates (AE2), there has been a rapid pick up in construction activity while manufacturing has actually taken a hit. While manufacturing is still in positive territory over a two year period, the manufacturing in the fourth quarter has been negative. That means, the supply chain constraints have been a key irritant for manufacturing. Also, the contact intensive sectors like trade, hotels and transport saw the negative growth deepening.

The good news is that, despite the combination of factors like Fed hawkishness, surging inflation, supply chain constraints and the Omicron overhang, the impact has not been too intense on GDP. That is the good news.