In Focus

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

Growth of economy in Q1 FY22: Govt spend shoring up GDP

The country’s economy continues to be stressed and the level of economic activity is significantly lower than the pre-pandemic period, i.e., Q1FY20.

Even though the Q1FY22 GDP on a year-on-year basis grew by 20.1 %, on a sequential (quarter-on-quarter) basis the domestic economy conGrowth of economy in Q1 FY22 September 15, 2021 Corporate India 27 tracted by 16.9% during the quarter following three quarters of positive growth, i.e., Q2FY21-Q4FY21. When compared with the pre-pandemic period, i.e., Q1FY20, the GDP growth rate in Q1FY22 is negative 9.2% CARE Ratings had estimated the country’s economy to grow by 13.1% in Q1FY22 (year-on-year).

Despite the weakness, India is one of the select few economies that have witnessed positive year-on-year growth in the last three consecutive quarters and is amongst the fastest growing economies during April-June 2021.

Improving sectors

There has been a broad-based year-on-year growth across all sectors in Q1FY22, driven by the high negative growth of Q1FY21.

Nearly all the sectors have witnessed a contraction in output in Q1FY22 from the preceding quarter, i.e., Q4FY21. The GVA contracted by 13% on a sequential basis, following an average growth of 11% in the preceding three quarters. The utility sector (electricity, gas, water supply and other utilities) and the financial services, real estate and professional services sector are the only two segments that have recorded positive sequential growth in Q1FY22 (over Q4 FY21) of 3% and 19% respectively. These two sectors together accounted for 18% of the GVA in the quarter gone by.

BUCKING THE TREND

On comparing the level of output in Q1FY22 over the pre-pandemic period of Q1FY20, only the agriculture and utilities segments (electricity, gas, etc) have seen an increase in output by 8% and 3% respectively.

The utilities segment has been the most resilient in terms of growth. It has registered positive annual, sequential as well higher growth over the pre-pandemic period. The sector accounts for 3% of the GVA. On a year-on-year basis, the sharpest growth in Q1FY22 has been in industry (by 46%). The manufacturing (50% growth) and construction (68% rise) sub-segments have pushed up overall growth for the sector. This increase is credited to the low negative base. A likely reason for the higher growth in the manufacturing sector in Q1FY22 is the strong annual growth in corporate profits for the period (also aided by a low base). Corporate profits are used as a proxy for estimating output for the manufacturing sector.

The contraction in the agriculture sector on a quarterly basis (by 11% in Q1FY22) is reflective of the impact the spread of the second wave of the pandemic to rural areas has had on output of the agriculture and allied segments. The impact of the reimposition of lockdowns/restrictions is evident on the services sector, viz., trade , hotels, transport and communication, which has contracted by 35% in Q1FY22 from that in Q4FY21.

Consumption and investment

Private consumption and investment continue to be subdued and have contracted on a sequential basis (by 15% 28 Corporate India September 15, 2021 and 21% respectively), while also remaining below the prepandemic levels (3% and 9%). Here too, on a year-on-year basis, there has been an increase in private consumption and investment in Q1FY22 owing to the low base of Q1FY21.

Government consumption has been supporting overall GDP. It has been 6% higher in Q1FY22 over Q4FY21 and is 24% more than that in Q1FY20. The rate of private consumption at 56% of GDP in Q1FY22 has been the lowest since Q4FY14 As a percentage of GDP, investments (as measured by Gross Fixed Capital Formation) at 27% in Q1FY22 were at a three quarters low.

India vs. others

Economies across regions registered high levels of economic growth (year-on-year) during April-June 2021. This can be put down to the statistical effect of a low base, i.e., negative, or very low growth rates in the same period of last year. Regardless of the statistical advantage in the high growth numbers for the three months to June, there has been a steady recovery across economies following the easing of pandemic restrictions. Higher private consumption coupled with the pick-up in Covid-19 vaccination has been boosting economic activity across sectors. In case of the advanced economies, the continued government support has been a significant factor supporting the economic recovery.

India has been among the few major economies such as China, Vietnam and Taiwan that have been registering positive year-on-year economic growth for the last three consecutive quarters. The major European economies returned to growth only in the latest quarter (April-June 2021) after registering negative year-on-year growth after a gap of a year (four quarters). In terms of growth rate (year-on-year) during April-June 2021, India’s economy grew faster than the majority of the 52 nations that have reported their economic output for the period. Only four economies (Macau, Peru, Azerbaijan and the UK) have registered GDP growth higher than that of India. This high growth reading for the country can be credited to the favourable low base of the year-ago period. India had registered one of the sharpest contractions in economic growth globally (along with Macau and Peru) during April-June 2020.

CARE Ratings’ View

The domestic economy continues to be stressed despite the high growth numbers for Q1 FY22. There is optimism that the economy would see a pick-up with the easing of the restrictions since June 2021. We have revised upwards our projection for the FY22 GDP from 8.8-9% earlier to 9-9.1%, with the growth in the Q1 GDP being higher than our estimate. Economic activity is expected to attain and surpass the pre-pandemic level from Q3FY22 onwards.

The downside risk to the projection would primarily be a resurgence in the pandemic and weak demand conditions. A pick-up in consumption during the festive season in Q2 and Q3 would be key to the country’s economic growth prospects for the financial year. With the expected higher value of GDP, our estimate for the fiscal deficit as a proportion of GDP for FY22 is being revised downwards from 7.7%-7.8% to 7.6%-7.7%. Given the weakness in the domestic economy, the RBI is expected to maintain its focus on growth and continue with its accommodative policy stances.