These growth numbers will moderate going ahead, as the base effect becomes weaker provided there are no further lockdowns
The Q1FY22 GDP growth number at 20.1 per cent looks impressive as against a decline of 24.4 per cent in the previous quarter of the last fiscal. This was expected as the negative base effect was going to distort the picture. Given that the first two months of this quarter were typified by state-driven lockdowns, there was impairment of activity especially in the services sector. Here, too, there has been impressive growth in the trade/transport/hotels etc. sectors, which was pushed back further by the lockdown. Yet the growth was of the order of 34.3 per cent. Therefore, these numbers need to be viewed more of a statistic rather than a reflection of the state of the economy, which is better captured by numbers like the PMI, GST collections, etc.
While this number looks impressive, the gross value added, or GVA, in the economy had moved from Rs 33.05 trillion to Rs 25.65 trillion last year, and now has moved up to Rs 30.47 trillion. Therefore, we have not yet reached the Q1FY20 level, which is understandable. Agriculture is the only sector that has been impressive with 4.5 per cent growth on top of 3.5 per cent. Here, we can credit the good Rabi crop where the residual part enters the Q1 calculations. Agriculture will continue to be the driver in the next few quarters; hence, the Kharif prospects are important.
It should be noted that corporate results that involve earnings before interest, depreciation and taxes (EBIDT) enter as proxies for various calculations in the GVA. A very good quarterly performance, especially in sectors like steel, cement, trade, etc. gets reflected in the GVA numbers here. Manufacturing, in particular, has benefited from both the higher growth in profit (with salaries added to arrive at GVA) and higher IIP growth due to the base effect. For Q2FY22, too, we may expect corporate results to be good and add buoyancy to the GVA numbers. This will taper down in Q3 and Q4, as they had reached more reasonable levels in the same period of last year.
A slight concern here is the growth in the financial/real estate sector, which is just 3.7 per cent over -5 per cent last year. One would have expected higher growth here, as the realty sector was supposed to recover. This is one segment that has the power to drive the economy at a faster pace, especially when growth in banking (deposits and credit) is lacklustre.
The standstill in the economy last year also meant that capital formation had come down sharply. This has gone up to 27.2 per cent now, though when compared with FY21 is at the same level. Consumption as a ratio of GDP has been lower this time, mainly due to increase in capital formation. Last year, the ratio of consumption was higher at 56.9 per cent. This time it is down to 55.8 per cent. In fact, both the years were typified by lockdowns in the country, and it does appear that the lockdown during the second wave shook consumption more than the first one.
So, how would the number look like going forward? These growth numbers will moderate going ahead, as the base effect becomes weaker provided there are no further lockdowns. The services sector will hold key, and so will the government. The recently announced fiscal numbers do show that the government has spent less than last year in the first four months as relief expenditure has been lower. This got reflected in lower growth in the public administration category. There would be a need for a positive push here to ensure that this cylinder fires. Growth for the year could be in the region of 9 per cent–9.1 per cent.
The author is chief economist at CARE Ratings and author of “Hits & Misses: the Indian Banking Story”. Views are personal.