No surprises in first advance estimate of GDP, govt expenditure crucial

Rural economy is helping consumption demand, but it is inadequate to compensate for the loss of urban demand.

First advance estimate of national income, 2020-21 pegs FY21 GDP growth at -7.7% (India Ratings & Research: -7.8%).  This is in line with RBIs assessment of -7.5% growth in FY21. It is now official that the Indian economy is having its sharpest contraction in post-Independence history. When entire economy was in lockdown for two months this was on expected lines.

Key GVA trends for 2HFY21 are:

1. Agriculture is expected to grow at same rate as in 1HFY21.
 

2. Manufacturing (1HFY21: -19.4%, 2HFY21: 0.5%), electricity (1HFY21: -1.4%, 2HFY21: 7.1%), construction (1HFY21: -30.2%, 2HFY21: 4.4%), finance (1HFY21: -6.8%, 2HFY21: 7.1%) and public administration (1HFY21: -11.3%, 2HFY21: 3.3%) are likely to have positive growth.
 

3. GVA growth to turn positive at 0.3% (1HFY21: -14.9%).
 

Though growth numbers of both contact intensive services sector and non-contact intensive industrial sector on annual basis looks bad, manufacturing and electricity and other utilities recorded positive growth in 2QFY21. Even the mining and construction sectors saw significant reduction in negative growth in 2QFY21.

Key GDP trends for 2HFY21 are:

1. Private final consumption expenditure (PFCE) contraction to moderate (1HFY21: -18.9%, 2HFY21: -0.6%).

2. Government final consumption expenditure (GFCE) to have sharpest expansion (1HFY21: -3.2%, 2HFY21: 17.0%),

previous peak in 2011-12 series was 13.8% in 1HFY18.

3. Gross fixed capital formation (GFCF) contraction to reduce sharply (1HFY21: -28.1%, 2HFY21: -0.8%).

4. GDP contraction to reduce sharply (1HFY21: -15.7%, 2HFY21: -0.1%).

Although rural demand, on the back of four consecutive good harvests, is lending support to the consumption demand, it is inadequate to compensate for the loss of urban demand. Urban demand, despite gaining some momentum lately, may remain subdued due to the depressed consumer sentiment and lower economic activity/employment generation.

Monetary and fiscal measures, although have eased the liquidity requirements and are supportive of consumption but may still not be sufficient to spur investments as capacity utilisation has not yet fully recovered even to the pre-COVID level.

The headline number of 7.7% contraction looks feasible. These trends suggest that while the economy is recovering from its lows of 1QFY21, it is still not out of woods and need support. Out of four major institutions – public sector, private sector, general government and households – it is the general government, which have to lead the recovery. Imputed GVA growth of public administration and GFCE growth suggests that -7.7% GDP growth estimate is contingent on government (both central and states) spending. If GFCE growth slows down to 10% in 2HFY21, 2HFY21 GDP contraction will increase to 0.4% from 0.1% and FY21 contraction will widen to 7.9% from estimated 7.7%.

On annual basis 3.7% contraction in GVA of public administration and mere 5.8% growth in GFCE (lowest in last seven years) at a time when economy is facing its worst appears to be intriguing. 

Although the headwinds emanating from COVID-19 related challenges are unlikely to go away till mass vaccination becomes a reality, economic agents at least in the non-contact intensive sector appears to be gradually learning to live with it and economic activities are adjusting swiftly to the post COVID-19 world. India Ratings & Research expects GDP growth to turn positive in 4QFY21 and FY22 GDP to come in at 9.6%.

Based on FY21 nominal GDP numbers, government is likely to use 13%-14% nominal GDP growth for FY22 budget leading to a nominal GDP of INR220 trillion for FY22.

(The author is chief economist, India Ratings & Research. Views expressed are personal. They do not reflect the view/s of Business Standard.)