India’s economy regained rather a lot of lost steam in the December quarter, to register a flat development of .4% soon after two consecutive quarters of deep contraction triggered by the pandemic, but could possibly slip a bit in the existing quarter, according to the information released by the National Statistical Office (NSO) on Friday. In the economic year 2020-21, the gross domestic solution (GDP) would contract by 8%, the sharpest drop in recorded history, as per the second advance estimate the contraction was previously noticed at 7.7%.
A choose-up in private consumption, largely driven by release of pent-up demand by affluent households and sections of the middle class, government investments, strong overall performance by the agriculture sector and revival of manufacturing, building, banking and true estate activities aided the recovery from the abyss (see chart). The recovery is, on the other hand, nevertheless not broad-based. Also, its sustainability is not confirmed beyond doubt, while a incredibly favourable base would increase the numbers in Q1 and Q2 of the next economic year.
Of course, NSO, which has faced graver information challenges due to the pandemic, resorted in a more than usual degree to extrapolations to compute the GDP, and admitted that the most up-to-date set of numbers had been for that reason probably to undergo sharp revisions in due course (the NSO has currently revised GDP development prices for Q1 and Q2, each released soon after the onset of the pandemic, to -24.4% and -7.3%, respectively, from -23.9% and -7.5% estimated earlier).
It is also getting noted that given that the NSO relied on the economic overall performance of significant listed providers, which have cornered industry share from the smaller sized firms in current months, to gauge the gross worth added (GVA) by market, its conclusions could be significantly less reflective of the grimmer realities in the SME sector, amongst smaller traders and in the informal sector. At the broader level, the financial activities are lingering under the Pre-Covid level.
The second advance estimate for FY21 indicates an improvement in GVA development to 2.5% in the fourth quarter. But it projected the GDP to slip back into a 1.1% contraction in the March quarter, due to back-ended release of subsidies by the government.
Given that demand is nevertheless somewhat muted and the pricing energy gained by significant providers may well not be all that sustainable, government expenditure has to be stepped to obtain the estimated development price in Q4. In current months, the Centre has certainly stepped up spending to help the economy and also effectively roped in CPSEs in the venture, but the income-starved state governments have been forced to slow their capex.
The central government’s spending budget capex grew a steep 335% on year in January, up from 63% December and 249% in November its all round spending budget spending grew 49% in January, versus 29% in December and 48% in November.
In reality, if the Centre had been to meet the revised budgetary expenditure estimate (RE) for FY21, it would have to more than double the commit in Q4 from the year-ago level. A fantastic element of this additional spending would propel development, while significant lumpy products like clearance of fertiliser subsidy arrears to market and release of dues to FCI would have only minimal effect.
Private final consumption expenditure, the biggest pillar of the economy, suffered a a great deal reduced contraction (-2.4%) in Q3FY21 compared with -11.3% in Q2 and -26.3% in Q1, enabling it to up its share in GDP to 60.2% in Q3 from 56.7% in Q1. Gross fixed capital formation also enhanced from -46.4% development in Q1 to -6.8% in Q2 and, additional, to 2.6% in Q3, reflecting government capex, rather than private investments.
As far as the quick prospects are concerned, the finance ministry earlier this month stated higher-frequency indicators, which includes energy consumption, inter-and-intra-state mobility, manufacturing capacity utilisation, company expectations and customer self-confidence, in January point at a “sustained and strengthening economic recovery”. Manufacturing PMI hit a 3-month higher in January, though services PMI rose to 52.8 final month from 52.3 in December, staying above the 50-level mark that separates development from contraction for a fourth straight month.Merchandise exports rose 6.2% in January from a year just before, the highest in 22 months and compared with a .1% rise in December, signalling a nascent recovery following the Covid shocks.
However, the output of eight infrastructures, with a close to 40% share in the index of industrial production, remains subdued. In reality, soon after a .6% rise in September, it slid at a more rapidly pace of .9% in October and 2.6% in November just before inching up marginally by .2% in December and .1% in January.
Icra principal economist Aditi Nayar stated: “Various lead indicators have recorded a loss of momentum so far in the fourth quarter, in contrast to the improvement in sentiment brought on by the vaccine rollout. We expect consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self-employed.”
Nominal GDP on which crucial spending budget numbers are benchmarked, is estimated to contract by 3.8% in FY21, against a 4.2% fall estimated earlier. This will lower FY21 fiscal deficit marginally from 9.5% (as per the revised Budget estimate) to 9.4%.
With the easing of external headwinds, exports have begun to recover, so have imports. So, the pulldown effect of net exports could exacerbate once again in Q4, with a stronger rebound in imports, as domestic demand is displaying indicators of a revival. The share of exports in GDP (in true term) is anticipated to stay unchanged at 19.4% in FY21.
Reacting to the GDP information, the finance ministry stated the development in Q3 reflects “further strengthening of V-shaped recovery” that started in Q2. The resurgence of the gross fixed capital formation was also triggered by powerful capex by the Centre. The fiscal multipliers linked with capex are at least 3-4 occasions bigger than government final consumption expenditure, it stated.
Kunal Kundu, India economist at Societe Generale, stated a choose-up in investment enabled the economy to record a marginally positive development, as did a reduced trade deficit on account of significantly less-than-robust financial activity. “Going forward, we believe that investment and not consumption will be India’s growth driver,” he stated.