GDP grows 0.4% in Q3 after shrinking for two quarters, may fall in Q4: NSO

Imputed Q4 GDP seen falling 1.1%; Services to catch up with mfg; Tall growth of 30% in govt spending needed; Investments better than expected, show revised numbers

India’s gross domestic product returned to growth -- of 0.4 per cent -- in October-December after two quarters of contraction, the National Statistical Office (NSO) said on Friday.

In 2020-21, GDP is set to fall 8 per cent against an earlier estimate of 7.7 per cent, the release said.

This is a “reflection of further strengthening of V-shaped recovery”, which began in Q2 of 2020-21, especially after a large GDP contraction in Q1 due to the lockdown, the Ministry of Finance said in a release.

However, the cheer may not last because GDP is likely to fall 1.1 per cent in Q4 if we triangulate the data available for the first three quarters with the annual estimate.

A more surprising fact is that even this likely contraction in Q4 needs 29 per cent real growth in government spending.

Expenditure by the government fell in Q2 and Q3 when the private corporate and informal sectors in the economy were in pandemic pain, the data shows.

This suggests that economic recovery will be a delayed V-shaped one, with some drag towards the last quarter of FY21, despite the massive spending push of over Rs 4 trillion announced in the Union Budget this year.

Consumer spending, which is the driving force behind India’s economy because it accounts for 60 per cent of the GDP pie, fell 2.4 per cent in Q3, refusing to recover, despite the quarter being in the festive season.

Investment, on the other hand, has grown sharper than expected. After a massive fall in Q1, real gross fixed capital formation (GFCF) recovered fast in Q2 and grew 2.6 per cent in Q3.

“The resurgence of GFCF in Q3 was triggered by central government capex, which increased 129 per cent in October, 249 per cent in November, and 62 per cent in December 2020,” the finance ministry said.

Capex induces much higher consumption spending than normal income transfers, the ministry added.

Services were dealt a heavy blow by the pandemic because they are more contact-intensive, but their gross value added has matched the previous year’s level in Q3. Manufacturing grew in Q3, but feebly. In Q4, the imputed calculation shows services catching up with manufacturing in terms of real growth.

Gross value added (GVA) in financial services and real estate improved greatly in the third quarter, clocking 6.6 per cent GVA growth in Q3. Similarly, construction raced ahead, with its GVA growing 6.2 per cent in the quarter.

Construction is one of the biggest job providers in India’s economy, and its revival is crucial for bringing the livelihoods of those worst-affected by the pandemic back to normal. 

The investment rate in the economy is likely to improve to 26.7 per cent of GDP in 2020-21, an improvement from the 24.4 per cent seen in the first advance estimate (FAE).

The rate improved from 20.6 per cent of GDP in Q1, the lockdown quarter, to 27.7 per cent in Q3. It is expected to improve to 29.5 per cent of GDP in Q4.

GDP at market prices is GVA plus indirect taxes minus subsidies. Growth in GVA is seen to be picking up to 2.5 per cent in Q4, when GDP is likely to fall.

“This may be an unintended consequence of the back-ended release in the government’s subsidies,” Aditi Nayar, principal economist at ICRA, said in a note. 

The imputed fall in GDP in Q4 may be arrested after revisions in the quarterly GDP data.

“The data for Q1 and Q2 has undergone changes, which suggest the compression was sharper than expected earlier, as is the recovery. As the Q4 data for both FY19 and FY20 will undergo a revision, the economy is expected to continue to show positive growth in the fourth quarter,” said Sunil Kumar Sinha, principal economist at India Ratings.

The NSO’s second advance estimate (SAE) shows that nominal GDP will fall 3.8 per cent in FY21. This probably takes the high inflation in the second half of FY21 into account. While the deflator in the FAE stood at 3.5 per cent, it has risen to 4.2 per cent in the SAE.