Q2 GDP: Signs of durability amiss as momentum wanes after festive season

While rising vaccine coverage and fuel tax cuts will boost confidence and re-invigorate demand, the spectre of higher prices may contain the consumption recovery in H2FY22

India’s real GDP expanded by a higher-than-expected 8.4 per cent in year-on-year (YoY) terms in Q2FY22. With this, the absolute level of GDP reverted mildly above the pre-Covid level of Q2FY20, which should be a cause for celebration.

Sorely, the disaggregated data for Q2 FY2022 does not offer signs that the recovery had gained a durable momentum. Private and government consumption expenditure in Q2FY22 lagged their pre-Covid level by 4 per cent and 17 per cent, respectively. The impact of this was offset by a dizzyingly sharp rise in valuables relative to the pre-Covid level of Q2FY20, led by the near tripling in imports of gold and silver. On the bright side, gross fixed capital formation displayed a rise of 1.5 per cent in Q2FY22 relative to Q2FY20.

Moreover, the NSO has pegged the pace of growth of gross value added (GVA) at basic prices at 8.5 per cent in Q2 FY2022, surpassing our forecast, led by agriculture, forestry and fishing, and public administration, defence and other services. Setting aside these two sub-sectors, GVA recorded a relatively lower YoY growth of 7.5 per cent in Q2 FY2022.

In particular, the GVA growth of crucial sectors such as manufacturing (5.5 per cent), construction (7.5 per cent) and trade, hotels, transport, communication and services related to broadcasting (8.2 per cent) trailed our forecasts, suggesting that rising input costs bit into corporate margins, and contact-intensive services continued to trail the pre-Covid levels.

As expected, other than financial, real estate and professional services, and public administration, defence and other services, all the other sub-sectors of industry and services recorded a base effect-led slowdown in YoY growth in Q2FY22 relative to Q1FY22, while the performance of agriculture was steady despite an exceedingly uneven monsoon.

Following the re-opening after the second wave, the performance of GDP relative to the respective pre-Covid quarter recorded a significant improvement, to a growth, albeit marginal, of 0.3 per cent in Q2FY22 from the contraction of 9.2 per cent in Q1 FY2022.

Looking ahead, we anticipate a brisk pace of Central and state government spending in H2FY22, following improved revenue visibility, even as the base effect is particularly unfavourable for Q4 FY2022.

However, after a broadly healthy festive season, many indicators have displayed a flagging momentum in November 2021. While rising vaccine coverage and fuel tax cuts will boost confidence and re-invigorate demand, the spectre of higher prices may contain the consumption recovery in H2 FY2022.

With the discovery of the Omicron variant of Covid-19 reigniting uncertainty regarding the strength of global demand and cross-border flows, we are maintaining our estimate of a 9.0 per cent growth in real GDP in FY2022 for now, in the absence of concrete evidence regarding the durability of domestic demand.

Given the renewed uncertainty, we expect a status quo from the MPC and the RBI in the December 2021 policy review. However, the tone may record a less-than-subtle shift, to signal an upcoming change in the monetary policy stance to neutral in the February 2022 policy review, as long as the new variant of interest doesn’t become a source of new lockdowns in the intervening months.

The author is Chief Economist, Icra. Views are personal