FY22 GDP estimate on expected lines, but there can be a downward bias

The next fiscal year (FY23) will be the one to watch out for and assuming that there would be no more Covid shocks, growth would be more real

Forecasting GDP growth, three months before the financial year comes to an end with full information for 6 months and partial data for another 2 months in an environment when the pandemic is in full flow and the actions of the government unknown, is an audacious task. Yet it is needed to have some grip over the final outcome though admittedly the number is susceptible to change. This advance estimates also can put all other forecasts in some perspective given that while the government is upbeat of growth in the region of 10%-11%, the RBI has so far pitched for 9.5%.

Firstly, the CSO estimate of 9.2% (as against Bank of Baroda’s 9.3%) indicates that the economy is still going to do well this year notwithstanding the impact of different kinds of lockdowns in the fourth quarter of the year. But significantly it will not be in accordance with the government’s forecast, which also means that the Budget for FY23 will have to take into account this number of Rs 133.5 trillion as real GDP. Also it needs to be mentioned here that growth over FY20 would be around 1.3%, which is quite marginal. Therefore it can be interpreted as recouping the loss of output in FY21 due to covid. This also means that for two successive years, growth has been pushed back due to the pandemic.

Second, the estimates also show that there is going to be an increase in gross fixed capital formation from 27.1% to 29.6%. This could be challenging given that private sector investment is down and states have been cautious in their capex given the uncertainty on their fiscal balances. The Centre is probably the only entity that has been spending as per the Budget, but would at best complement the private sector and cannot lead the investment cycle. This number could be susceptible to a major revision when the final estimates are released.

Third, there are also indications that consumption growth is going to be buoyant with growth of 15.4% this year. While the low base effect does prop this number, even when compared with the FY20 number, it is fairly high at 8.5%. 

Both growth in consumption and investment would probably be revised downwards as the estimate has not taken into account the Covid impact though it is mentioned that the reaction of the government to the same can affect the final outcomes.

Across the sectors, as expected growth has been impressive due to the base effect of FY21 when most sectors de-grew. Here too when compared over FY20, the emerging picture is quite different. Growth in trade, transport etc  was very high at 11.9%. But this sector has still not made up for output lost since FY20 and value addition is lower than the pre-pandemic year by around Rs 2.3 trillion. Even manufacturing, which grew by 12.5% this year, would register growth of just 4.4% over FY20.

Therefore, it does appear that the advance estimates indicate that in the absence of any major lockdowns being imposed by the government, the economy can come back to the level of FY20, which itself was not a very buoyant year with growth of 4%. The next fiscal year will be the one to watch out for and assuming that there would be no more Covid shocks, growth would be more real. This also means that the RBI may decide to hold on in the February policy with growth not yet being stable. The inflation number will, however, be an important consideration.

Madan Sabnavis is chief economist at Bank of Baroda. Views here are personal.