Economy

Published: Dec 29, 2021
Updated: Dec 29, 2021

Q3 good, but FY21 GDP still negative

The Indian economy emerged from recession and returned to growth in the quarter of October-December 2020, following two successive quarters of contraction. The economy grew by 0.4% in the third quarter of FY21, which is a sharp improvement from the negative growth of 24.4% and 7.3% in the preceding two quarters. The Care Ratings estimate for GDP growth for the quarter was in the range of -0.5% to -1.5%. According to Care Ratings, India is one of the select few economies that have witnessed positive year-on-year growth in the three-month period OctoberDecember 2020.

This gives credence to the general expectation of a quick revival in the domestic economy and this has led to the government revising upwards its growth estimate for GVA (gross value added) for FY21 from -7.2% (first advance estimate) to -6.5% (second advance estimate). The GDP estimate for FY21 however has been revised downwards from the earlier estimate of -7.7% to - 8.0%. This is due to the lower incidence of taxes as well as higher subsidies which has been revised downwards from -13% to -23%. There has also been a downward revision in the Q1FY21 GDP (from -23.9% to -24.4%) and upward revision in that of Q2FY21 (from -7.5% to -7.3%). The unlocking of the economy with the steady decline in Covid-19 infections during the period (Oct-Dec) boosted consumption and activity across sectors. The gains in the Indian economy during the October-December 2020 period were driven by growth in agriculture, manufacturing, electricity, gas, water & utility services, construction and financial, real estate and professional services. Both consumption (private and government) and investments have recorded growth (yoy) during Q3 FY21, reversing the decline of the preceding two quarters.

Despite the improvements, the growth rates are notably lower than that of a year ago. The real GDP growth in Q3 FY21 at 0.4% is notably lower than the 3.3% growth of Q3 FY20.

SECTOR SHOW

The agriculture and industrial sectors witnessed growth, while the contact- intensive services sectors registered negative growth.

• The industrial sector has witnessed a growth of 2.7% aided by the growth in manufacturing (1.6%),electricity, gas, water & utility services (7.3%) and construction (6.2%). Manufacturing sector output returned to growth after a gap of four quarters while that of construction turned positive after three quarters, reflective of the higher levels of activity in these segments with the unlocking process. The favourable base effect has also aided the growth in these segments.

• The agriculture sector grew by 3.9% in Q3 FY21 over the 3% growth of a year ago.

• The contraction in the services sector eased from an average 16% in the preceding two quarters to -1.0% during October-December 2020.

• The core GVA growth, which excludes the agriculture and government sectors, was 0.7 % in Q3 FY21 against the 1.0% growth in overall GVA, indicating the higher contribution of the industrial and services segments in the improvements in the GVA.

• The trade, hotel and transport segment registered the highest contraction amongst the sectors during October-December at -7.7%.

• Public administration, defence and other services saw growth contract by -1.5% in Q3FY21. There was however an improvement from the contraction of over 9% in the preceding two quarters reflective of the higher spending being undertaken by the government during the quarter gone by.

CONSUMPTION

• There has been a pick-up in consumption – both government and private — in the October-December period.

• Private consumption, which is the driver of the economy (accounting for 60% of the GDP) witnessed a growth of 1% in Q3 FY21. Although significantly lower than the 11% growth in Q3 FY20, it is a notable improvement from the growth of - 25% in Q1FY21 and -8% in Q2FY21.

• Government consumption too witnessed an improvement, growing by nearly 7% in Q3 FY21 from a year ago.

INVESTMENTS

• Investments too have picked up, registering year-onyear growth after a gap of three quarters. Investments measured as Gross Fixed Capital Formation (GCFC) grew by of 6% in Q3 FY21 versus the 1.4% growth in Q3 FY20.

• The rate of consumption increased to 60% of GDP in Q3 FY2, a 3% increase from the preceding two quarters.

• As a percentage of GDP, investments (as measured by the Gross Fixed Capital Formation) at 28% in Q3 FY21 were at the highest rate in five quarters.

COMPARATIVE GDP

How does India’s economy compare with other key economies during October- December 2020? India belongs to the select club of economies along with China, Taiwan and Vietnam that have witnessed positive year-on-year growth in the three months of October-December 2020. There has been a faster than expected pick-up in the global economies from the pandemic-induced slump. Although most economies still continue to witness a contraction in economic growth from the year-ago period, there has nevertheless been a progressive strengthening in most economies in the last two quarters of 2020.

Fiscal support and easy financing conditions have been supporting recovery across economies. There has also been a pick-up in exports as well as consumer spending associated with the easing of pandemic restriction in various regions. Higher construction activity and industrial production has been boosting economic growth in advanced economies (the US, Germany, China).

Even regions like the Euro Area and North America, which have had continued and stricter lockdown measures, have witnessed better than expected economic growth in the last quarter of 2020, indicating that the pandemic restrictions have been less economically disruptive.

‘VACCINE BOOST’

According to Care Ratings, the pace of commercial and business activity in the domestic space is expected to gather pace on the back of vaccination-driven optimism and policy support. Although there is vaccination-driven optimism regarding the revival of commercial and business activity, domestic economic growth continues to be underscored by uncertainty, given the resurgence in Covid infections across states that has raised the spectre of fresh pandemic restrictions just as the economy is in the throes of recovery. We expect the Q4 GVA to grow by 1.5% to 2% in Q4. For FY21 as a whole, we retain our earlier estimate and expect India’s GDP to contract by -7.7% to -7.8%.