Q4 GDP numbers: Carving FY22 recovery amidst Covid setbacks

India’s Q4 GDP is reminiscent of the growth trend prior to second wave of COVID. Ground realities have sweepingly altered since then, with the health crisis nudging a sequential setback in growth momentum in Q1-FY22. Capturing this, our FY22 GDP growth stands revised lower by 150 bps at 10.0 per cent. But, a rear-view assessment of Q4 FY21 remains relevant for three reasons for it offers insights for FY22, as we argue below.

Pandemic new normal

Q4 FY21 GVA at 3.7 per centYoY is perhaps a sound verdict on how normal can economic activity get in a pandemic environment. Amidst low infections, Q4 saw improved mobility and recovery in demand not just for goods (pent-up demand) but also services, as contact-intensive sectors such as hotels, restaurants, aviation, tourism resumed operations gradually.

What does this tell us for FY22?

Q4 GVA growth is perhaps the bare minimum that India as an economy can clock when the second wave ebbs. Throw in progress on vaccines, and we are definitely looking at a betterment. But the big question that remains is whether consumers will mimic their past behavior to allow a reversion to this trend. We believe that perhaps yes, but not as quickly. The compulsion to maintain precautionary savings (amidst higher out of pocket health expenses and lingering uncertainty), exhaustion of part of pent-up demand last year, rural demand losing its vigor will mean a longer wait for consumption rebound perhaps until vaccinations attain critical mass. On the supply side, elevated global commodity prices can possibly add another binding constraint.

Government as a savior

The spurt in Q4 Government consumption (+28.3 per centYoY) and investments (10.9 per centYoY spike in GFCF is suspected to be Government led), may well get reinforced in FY22. The second COVID wave and the induced dent to growth necessitates this spending elixir to remain a savior. The actualisation of the budgeted spending on Government capex, pegged to rise to an all-time high of 2.5 per cent of GDP in FY22, has the potential to put growth recovery back on track and perhaps crowd-in private capex cycle at a later date. Expectations of a fiscal stimulus from the Government remain rife despite limited fiscal headroom. Perhaps, an easy antidote would be to frontload revenue spending earmarked to various welfare schemes, that can serve not only as a buffer against income losses and higher health expenses, but also cushion growth momentum in H1 FY22.

GDP may remain below GVA

Q4 saw a more pronounced divergence in GDP vis-à-vis GVA (at 210 bps in Q4 and 110 bps in FY21), with the one-time food subsidy adjustment announced in the Feb-21 Budget weighing on the NIT (Net Indirect Taxes) despite tax collections showing buoyancy in Q4. With a smaller part of these dues slated to be paid in FY22 also, GDP can be expected to remain below GVA in FY22 as well. Early signs of the second COVID wave endangering tax revenue collections, as foretold by the sharp decline in e-way bills registrations over Apr and May-21, may perhaps exacerbate this gap.

Outlook for FY22

Looking at incremental momentum in economic activity, after a strong pullback over April-May-21 (by nearly 50 per cent), our high frequency weekly Daily Activity and Recovery Tracker (DART) Index indicates flattening out of economic activity (in the week ending 23rd May-21). This amidst the recent moderation in COVID cases at an all-India level offers hope. The coming weeks are likely to see staggered state-wise exits from lockdowns albeit in a guarded and gradual manner.  We expect growth recovery to look more U-shaped in FY22 versus V-shaped in FY21, but tailwinds from a powerful global rebound, progress on vaccines and a favourable base will continue to prove supportive. Focus needs to shift towards revving up government led capex and employment creation. Meanwhile, the RBI too needs to continue to lean towards supporting growth, by retaining its accommodative stance and status quo on rates through the fiscal year.

Look through the gyrations

Indeed, while FY21 GDP reinforces the sharp slowdown in growth in a pandemic year, it also offers a low base for a mechanical bounce in FY22 recovery. A more sweeping assessment of FY21-FY22 indicates that by the FY22-end, India’s GDP will be close to pre-COVID levels. But this would also mean loss of 2 years of prospective growth. The outcome is synonymous with GDP trajectory beyond FY22 remaining persistently below pre-COVID steady state, a reflection of economic scarring - in our own estimates by close to 8-10 per cent over the foreseeable future.

 

Shubhada Rao, Yuvika Singhal and Vivek Kumar are with QuantEco Research. Views are their own