The economy sprang out of technical recession in Q3 FY2021, and expanded by a revised 0.5% after reporting two consecutive quarters of de-growth in the same fiscal. Also, the official GDP number underestimates the extent of the hit taken by the economy due to the pandemic.
Economist, Mahindra & MahindraProvisional estimates (PEs) for FY2021 GDP show that the economy contracted by 7.3%. This is slightly better than the 8% dip the Central Statistics Office (CSO) estimated in February. The Q4 GDP print, at 1.6%, turned out to be much better than the 1.1% contraction imputed using the full-year FY2021 print released in February and available April-December numbers.
Also surprising was the gross value added (GVA) number, rising by 3.7% in Q4, outpacing GDP growth significantly, owing to an unusually large spending on food subsidy in the quarter. Recall the discontinuation of Food Corporation of India (FCI) borrowings for food subsidy from the National Social Security Fund (NSSF) and transfer of this amount in GoI’s books in the budget.
At 7.3%, India’s FY2021 GDP contraction is the worst in the world. But this number hides more than it reveals. The economy sprang out of technical recession in Q3 FY2021, and expanded by a revised 0.5% after reporting two consecutive quarters of de-growth in the same fiscal. Also, the official GDP number underestimates the extent of the hit taken by the economy due to the pandemic. This is because of two key reasons: one, PEs are compiled using available results on the performance of the corporate sector based on a small sample of companies that publish quarterly results; two, proxies are used to estimate the growth in the unorganised sector across industries.
Around 4,400 listed companies have reported their quarterly results for the first three quarters of FY2021, and about 1,000 companies have reported for Q4 so far. This is just a fraction of the three lakh companies in the ministry of corporate affairs (MCA) database. The value added of this smaller sample does not account for majority of the value added by the corporate sector.
For instance, the value added — imputed as EBITDA (earnings before interest, taxes, depreciation and amortisation) plus salaries and wages of about 5,164 companies that published their quarterly results for FY2020 — amounted to about 54% of a larger sample of about 29,700 listed and unlisted companies whose financial information was available for the same year. This ratio will be even of alower value vis-à-vis all the three lakh companies in the MCA database.
Smaller companies have fared much worse than larger ones during the pandemic. So, the listed space that has relatively larger companies has performed better. This implies that PEs for FY2021 are likely to be revised lower in subsequent revisions.
PEs will be revised three times before the final GDP number for FY2021 is released. The first revised estimate (RE), to be based on a truncated sample from MCA and annual reports of corporates, will be released in January 2022. The second RE, based on a larger MCA sample and provisional Annual Survey of Industries (ASI) results, will be released in January 2023. The third one will be published in January 2024. The extent of the contraction in FY2021 GDP could well fall to double digits after these revisions incorporate more companies.
Another key issue pertains to India’s unorganised sector, contributing about 45% to India’s GDP, the highest among major economies. A large portion of this is agricultural, which is completely driven by the household sector. However, even excluding agriculture, the share of this sector is about 34% of GDP. In construction, trade and repairs, and hotels and restaurants, this is well above 50%. CSO uses proxies to estimate the growth of the unorganised sector. For instance, about 12% of the manufacturing sector is unorganised — at about 33% for textiles, apparels and leather products. The value added for the unorganised manufacturing segments is estimated using the index of industrial production (IIP) growth as proxy indicator.
The use of such proxies is likely to have lent an upward bias to FY2021 GDP numbers, given that the unorganised sector has probably fared much worse than the organised segment during the pandemic. This implies that GDP contraction is likely to be larger than estimated. However, this may not be reflected completely even post-future GDP revisions.
These two issues overlap and compound problems for GDP estimates for some segments more than others. Take hotels and restaurants, where interim results for just 60-odd companies are available. About 55% of this sector is unorganised. GDP estimates for this sector are potentially significantly overestimated for FY2021.
What does this mean for India’s growth recovery? The extent of growth rebound in FY2022, at 8-10%, should be interpreted carefully. Rebound may capture the upswing in fortunes of larger entities. So, policymakers must support the unorganised segment and smaller businesses with targeted measures to ensure supply-side damage is limited, and also to put a floor under consumption demand.
Inputs from Rahul Agrawal, economist, M&M