FY22 GDP estimates: Weak patches start to appear

Q3FY22 growth disappoints, led by manufacturing

Surprising the street, India’s economic expansion slowed to 5.4 per cent Q3FY22, depicting concoction of unfavourable base effect and consolidation of activity. The industrial sector led the slowdown where growth was sharply slower in manufacturing, partly owing to supply chain disruptions, led by auto sector and sequential easing in corporate profitability. Construction, on the other hand, contracted, wh­ile mining also slowed. Electr­icity demand remained resilient amid decent mobility level and freight traffic movement, while power consumption also held up well. Uneven monsoon and wea­ker rural demand implied agricultural growth weakened fur­ther to 2.6%. Services clearly was the linchpin of Q3 growth, again helped majorly by government spending.

FY22 growth revised down to sub-9%, with 4Q likely depicting further decline

The 8.9 per cent GDP growth in FY22 (9.2 per cent prelim estimates) partly also captures past revisions. The supply-side estimates depict that agriculture remains steady at 3.3%, while industry (10.3% vs. -3.3% in FY21) and services (8.6 per cent vs -7.8% in FY21) fully reverse the contraction seen in FY21. Within industry, manufacturing is likely to print a robust 10.5% in FY22, Services growth is led by public admin and other services, growing close to 12.5%, while trade, transport and communications also print at 12%. That said, this particular sector is still 6% below pre-Covid levels, even as all other sub-sectors have crossed pre-Covid levels. The implied Q4 print depicts that the economic recovery might see a minor bump down in Q4 led by mild Omicron wave, with GDP growth likely slowing to 4.8%, with ex-agricu­lture slowdown being led by services. Moderation in output of contact-intensive services, trade, etc. could be seen in Q4, along with those hit by supply chain disruptions. However, given the quick control of infe­ctions, healthy vaccination rates and fast removal of movement restrictions, the impact on activity seems to be mild.

Geopolitics weigh on near-term growth pressures …

Even as the Omicron impact in Q4 is likely to be mild, the current geopolitical escalation may lead to potential global energy trade and price disruptions and weigh on growth ahead. While the magnitude of the shock and the ev­olu­tion of geopolitical reve­rber­ations are uncertain, we ass­u­me the energy supply shock may resolve in coming months and likely will not leave a lasting mark on the global and domestic exp­ansion. However, it would clearly have a near term negative impact.

… while policy support to growth from fiscal and monetary end may still be needed

Going ahead, fiscal and monetary support will continue to nurture growth, especially as recovery in domestic economic act­ivity is yet to be broad-based. We see India’s growth to print around 7.5%-7.6% in FY23, we still see the next level of secular growth is missing, implying consistent need for policy support. We note India’s golden period of secular growth of 2003-07 was synced with the capex cycle pre-GFC. Consu­mption, specifically, private consumption has been the linchpin of India’s growth story post GFC but has been languishing post 2018 and has seen a secular hit since then. Mean­while, Effective fiscal impulse has been limited post Covid (m­uch like most EMs), unlike in DMs where the revenue expendi­ture multipliers have been strong.

…. as private economic agents are unlikely to lead the growth story

Consumption is the slowest to recover to pre-pandemic levels on the demand side. Income variance post pandemic is high as purchasing power seems concentrated at the top; the broader consumer space has lower incomes and savings through Covid. Private investment, on the other hand, is endogenous in nature — it first needs demand to fire and utilisation to rise. Thus even with a cleaner balance sheet, corporates are likely to be on wait and watch mode, especially as global uncertainty weighs on sentiments, demand and cost. Thus, we think the next leg of the cycle will continue to see these government consumption and investment drivers remain in the forefront. They will need to fill the growth and jobs bridge until private investment and consumption recover. Additionally, the pol­icy reaction function of RBI ahead is likely to be domestically driven and not led by the shock tantrum of western central banks.