Why euphoria around Q1 GDP is misplaced

Economists say trade, hotels, transport, and communications are sectors that have underperformed the most

The gross domestic product (GDP) growth for the first quarter of the current financial year (April-June) came at 20.1 per cent year-on-year on a low base as the GDP contracted by a massive 24.4 per cent during the same period of the last year due to a strict lockdown imposed to curb the spread of the coronavirus.

The first quarter of the current financial year was marked by an intense second wave of the pandemic. However, the economic impact was lower than the first one as lockdowns were local against a stringent national lockdown of 2020.

Chief Economic Advisor KV Subramanian said the GDP data for the first quarter reaffirms the government's prediction of an imminent V-shaped recovery made last year while adding growth would reach pre-pandemic levels next year.

Economists, however, were less enthusiastic. "The spectacular headline number cannot be interpreted as a V-shaped recovery. The fact that the economy has still not recovered to the 2019-20 level, which was in itself seen as a disastrous year for growth, is not good news," said Alok Sheel, professor at the Indian Council for Research in International Economic Relations (ICRIER).

While the first quarter number looks impressive, but on a perusal, the GDP is still lower than what it was in the last pre-pandemic first quarter of 2019-20. The GDP at Constant (2011-12) Prices in Q1 of 2021-22 is estimated at Rs 32.38 lakh crore, as against Rs 26.95 lakh crore in Q1 of 2020-21, and Rs 35.66 lakh crore in Q1 of 2019-20.

"In line with our expectation, the YoY GDP growth soared to 20.1 per cent in Q1 FY2022, with the low base of last year's stringent nationwide lockdown concealing the impact of the second wave of Covid-19," said Aditi Nayar, Chief Economist, ICRA.

"However, the sharp YoY expansion in Q1 FY2022 is analytically misleading, with a sequential slowdown of 16.9 per cent over Q4 FY2021 and a shortfall of 9.2 per cent relative to the pre-Covid level of Q1 FY2020," she said.

The first-quarter growth number was lower than the Reserve Bank of India's projection of 21.4 per cent made in the August monetary policy review.

"The optically robust Q1FY22 GDP growth of 20.1 per cent was led by pandemic-induced low base effects, but also reflected lower-than-initially-expected economic losses from Covid-II," said Madhavi Arora, Lead Economist, Emkay Global.

"The supply-side depicted Q1FY22 growth was led by manufacturing and construction while services remained a laggard with contact-sensitive sectors bearing the brunt of localized lockdown. Financial and real estate improved sequentially," Arora said.

According to economists, sectors that have underperformed the most are trade, hotels, transport and communications. These are the sectors that suffered the most during the second wave.

The ICRIER's Sheel pointed to a sharp fall in the share of consumption in the GDP by about four percentage points, led by government consumption. "This reflects the fact that fiscal policy had hardly any role to play in the macroeconomic response to the pandemic by putting income in the hands of those who lost their means of livelihood. The share of foreign trade and investment has increased, but except for exports, these are still below the 2019-20 level."

Growth projection revised upwards

Several economists and analysts have now revised the growth projections for the full financial year upward due to the increased pace of vaccination, seen as a protection from a possible third wave, apart from festival-related demand.

"For the full year FY21-22, we revise up our GDP forecast, and now expect the economy to grow by 10.2 per cent in FY21-22, modestly higher than the RBI's 9.5 per cent projection and our previous forecast of 9.2 per cent," said Rahul Bajoria, chief India economist, Barclays.

Interestingly the growth forecast was revised downward following the second wave. Before April-May this year, many projected double GDP growth, which was pruned down to a single digit. The RBI, for example, cut its growth projection for FY22 from 10.5 per cent to 9.5 per cent. Emkay revised up FY22 growth projections by 110bps to 10.1 per cent amid limited economic loss of Covid19 but said it may still be around 5-6 per cent lower than the pre-pandemic expected.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, said they continue to maintain a tone of cautious optimism for the remainder of FY22. The assessment is based on the economy expected to be provided momentum by the approaching festive season, accommodative fiscal and monetary policy backdrop, vaccination progress, and a better global growth outlook to be favourable for exports.

"As such, we continue to retain our FY22 GDP forecast of 10.0 per cent with some downside risks emanating from the possibility of another wave of Covid, besides a long term weakness in consumer sentiment, jobs, and incomes," he said.

"… mobility indicators, power demand and GST e-way bills generated have recovered quite well, while exports continue to be buoyant," said Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC.

Apart from vaccination, support from rural, particularly agriculture, needs to be monitored given the fluctuations in monsoon rainfall and its impact on reservoir levels and crop harvest, he said.

"In the medium term, export momentum could soften, and a K-shaped recovery could be insufficient to drive domestic demand, which will need a growth cycle in employment and wages," Balasubramanian added.

(The writer is a journalist)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.