Falling Covid infections, faster vaccinations seen pushing Q2 GDP growth to 8%

Economic growth impulses should strengthen even if RBI gradually exits its ultra-loose monetary policy stance

Revival of demand with falling Covid-19 infections coupled with the increased pace of vaccinations has helped economic activity pick up during the July-September quarter of the current financial year, resulting in GDP (gross domestic product) growth for the quarter clocking 8 per cent. The GDP for the second quarter of the financial year will be announced by the end of the month.

The Covid-19 pandemic wrecked the economy last year, and the GDP growth contracted by 7.3 per cent. Despite a deadly second wave in April and May this year, the country’s GDP expanded by 20.1 per cent during the April-June period, albeit on a lower base.

“Revival in domestic demand thanks to a receding Covid-19 count and improving vaccination rates is likely to translate into a sequential pick-up in the 2QFY22 growth numbers. Our GDP Nowcast model points to September quarter’s real GDP growth (2QFY22) at 8 per cent YoY,” said Radhika Rao, Senior Economist, DBS Bank.

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Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI), said their model forecasted GDP growth for the second quarter at 8.1 per cent with an upward bias. The SBI has revised the full year (FY22) GDP growth forecast upward, to 9.3-9.6 per cent from 8.5-9.0 per cent estimated earlier. “The reason for the upward revision is that India recorded only 11 per cent increase in Covid-19 cases during Q3 2021, second-lowest among top 15 most affected countries, and the increase in cases declined to 2.3 per cent in Nov’21 over Sep’21,” Ghosh said in a report.

During the monetary policy review in October, the Reserve Bank of India projected GDP growth for the second quarter at 7.9 per cent. The central bank projects 9.5 per cent growth for FY22. Barclays probably is the more optimistic on the growth numbers as it has projected 9.6 per cent expansion for the second quarter.

“We forecast India’s economy expanded 9.6 per cent y/y in Q3 21 (July-September, or Q2 of the fiscal year 2021-22), aided by a low base and a gradual reopening of contact-intensive services,” said Rahul Bajoria, chief India economist, Barclays in a note. “Our slightly adjusted forecast (previous: 9.9 per cent) indicates that the economy is still on track to grow in double digits for FY 21-22 at around 10 per cent, along with rapid growth in nominal activity given higher inflation as well,” the note said.

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The Barclays note observed that service activity gathered pace in Q2 after lagging initially despite supply-side shortages. “Indeed, while supply shortages weighed on manufacturing, the services recovery scaled greater highs during the past quarter. Consumer and business optimism is improving, leading to an uptick in job creation across sectors,” it said.

In its India 2022 Outlook report, Goldman Sachs (GS) also pointed towards accelerated economic growth in the coming year. While the GDP growth projection for the current year by GS is a tad lower than the others, at 8.5 per cent, growth in the next financial year is seen close to double-digit, at 9.8 per cent. “Notable contributors to growth in 2021 have been consumption and investment, which recovered from an unprecedented fall in 2020, albeit partially,” the report said.

Goldman Sachs expects growth in 2022 to be driven primarily by domestic demand, and consumption is likely to be an important contributor, driven by a notable improvement in the virus situation and adequate progress on vaccination. “We also expect the government to continue its focus on capital spending and are seeing signs of a nascent private corporate capex recovery and a revival in the housing cycle in India next year,” the report said.

Interestingly, most analysts see economic growth impulses getting stronger even if the Reserve Bank of India (RBI) is widely believed to gradually exit its ultra-loose monetary policy stance. The central bank has been maintaining the accommodative stance since the onset of the pandemic in March 2020 to support growth. Interest rates have been kept low, along with ample liquidity in the system. There has been some fine-tuning of the liquidity situation of late, which is seen as an indication towards normalising the liquidity situation.

In a further indication to restore normalcy, first, a reverse repo hike is seen, followed by the repo rate. “We expect the RBI to increase the reverse repo rate by a token 20-25bp at the December policy meeting. However, an increase in the repo rate is likely to only take place in April 2022,” Barclays said.

Goldman Sachs also sees repo rate only during the April-June period though the central bank is seen to continue its gradual exit from the present stance. “We expect the RBI to continue to exit the extraordinary monetary accommodation that has been in force since the beginning of the pandemic. In particular, we expect the RBI to hike repo rates by 75bp in 2022 (we expect the first repo rate hike in Q2 2022) following normalisation of the policy corridor (i.e. reverse repo hike of 40bp by Q1 2022),” the Goldman report said.

(The writer is a Mumbai-based journalist)