By Pranjul Bhandari, Aayushi Chaudhary & Priya Mehrishi
The October to December quarter (Q3FY21) true GDP grew .4% y-o-y (consensus: .6%, HSBC: 1.8%) versus a contraction of 7.3% y-o-y in the preceding quarter. Nominal GDP grew 5.3% y-o-y. GVA grew a tad much better at 1% y-o-y (-7.3% in 2Q), and 28% q-o-q sa annualised (101% in 2Q). In its second advance estimate, the statistics workplace has pegged FY21 GDP development at -8% y-o-y, a tad worse than the -7.8% estimated earlier. GVA development, on the other hand, was revised up to -6.5% y-o-y vs -7.% previously.
There are a handful of problems with the information, which need to have to be resolved, in our view:
Why is there such a sharp distinction amongst GDP and GVA development, each in the December quarter (.4% versus 1%) and also the complete year advance estimate (-8% versus -6.5%)? And amongst GDP and GVA, which is a much better indicator of recovery?
Why was the December-ending quarter GDP development substantially weaker than anticipated (.4% versus our expectation of +1.8%)?
We believe due to the fact of the following:
Payment of previous year meals and fertiliser dues may well be distorting GDP estimates: We know that GDP = GVA + indirect taxes – subsidies. We also know that indirect taxes grew sharply in the December quarter (GST grew +8% y-o-y central government indirect taxes grew 33% y-o-y). So for GDP to develop at a substantially slower pace than GVA, subsidies would have had to develop rather strongly. But why would that be?
Because the price range on February 1 produced it all also clear that more than two years, the government intends to spend off previous accumulated dues to intermediaries for meals and fertiliser subsidies (for instance, it intends to spend `1.7tr to the Food Corporation of India in FY21). Repayment of some of these bloated up subsidy development, thereby depressing the December quarter GDP development, in our view.
And the effect will be felt in the complete-year estimates. The statistics workplace released updated FY21 advance estimates for development, pegging GDP properly under GVA development (-8% versus -6.5%).
And right here is the next major surprise: Working out the government’s March quarter development estimates (from the complete year advance estimate) shows a 1.1% contraction in GDP alongside a 2.5% expansion in GVA. Again, reflecting the plans to repay additional dues more than the next handful of months. But also implying that India will go back into GDP contraction, which sits oddly with the reality that quite a few activity indicators have enhanced more than January and February.
Which quantity then much better reflects financial development? GDP or GVA. With GDP obtaining impacted by payment of preceding-year subsidy dues, we believe GVA will much better reflect financial development, not just in FY21 but also in FY22 (when some more of the previous year dues are scheduled to be paid off).
Turning to GVA development for the December quarter shows that the miss from our expectation was not as huge but nonetheless substantial (actual: 1% HSBC: 1.7%). What explains that?
One, reduced than anticipated manufacturing development: While manufacturing development at 1.6% y-o-y was in line with IIP Manufacturing, we had anticipated it to be greater offered corporate outcomes for the quarter have been sturdy. It is most likely that GVA manufacturing will be revised up subsequently. In reality, the statistics workplace warned that offered pandemic led information collection disruptions, development estimates are “likely to undergo sharp revisions”.
Two, weaker than anticipated government spending: While central government spending has picked up, it did not look incredibly buoyant in the GDP numbers. There could be two reasons—state spending remains weak, and a component of the rise in central government spending is just repayment of previous dues.
On the GVA front, though manufacturing disappointed and public services development remained in damaging territory, agriculture was resilient, and building and finance rose immediately into the positive development terrain. While the trade and transport category enhanced, it remained damaging, as substantially of it involves higher-touch services.
On the GDP front, private and government consumption remained damaging. Investment rose into positive territory (in line with building information), but net exports have been a drag on development as imports picked up sharply following the lockdown.
The rebound in the final handful of months was driven by pent-up goods demand. Growth more than the next handful of months could be driven by pent-up services demand, especially with the vaccine rollout progressing. We anticipate GVA to develop by 10.7% y-o-y in 2021 vs -6.3% in 2020 (calendar year).
Having stated that, dangers can not be ignored. Over the next handful of months, the sudden surge in new pandemic situations in a handful of states, greater oil costs, and increasing yields need to have to be monitored.
Beyond that, we believe the results with government stake sales, the reintroduction of the Insolvency and Bankruptcy Code, the specifics of the Production Linked Incentive scheme, and the continuation of social welfare spending will identify no matter whether India is in a position to translate the ongoing cyclical uptick into structural development gains.
Bhandari is chief India economist, Chaudhary is economist and Mehrishi an Associate, HSBC Securities and Capital Markets (India) Private Limited
Excerpted from India GDP (Oct-Dec, 2020) report, HSBC Global Research (February 26)