Q4 GDP is fine but recovery seems rattled and roiled: Economists, CFO News, ETCFO

From Left to Right: Crisil Chief Economist DK Joshi, QuantEco Research Economist Yuvika Singhal, and Societe Generale Economist Kunal Kumar KunduA robust showing of 1.6 per cent growth in the three months through March is fine but the economic recovery is likely to have been stalled in the first quarter of the current financial year on account of new virus disruptions and the picture looks significantly different now, leading economists said.

On Monday, India reported Q4 GDP numbers, which signalled a strong recovery during the period but that was before the second coronavirus wave had hit the country in early April. The second wave, more lethal than the earlier wave, prompted various states like Maharashtra, Gujarat, and Karnataka, to use curbs to slow the spread. The restrictions imposed in all these major output producers are continuing unabated and are seen impacting growth in the immediate current quarter.

The Q4 number is more like a rearview picture of the economy but the momentum has drastically changed since the inception of the second Covid wave.Yuvika Singhal, economist with QuantEco Research, told ETCFO

Q1FY22 GDP Outlook

The growth in the Q1FY22 is likely to appear high due to a low favourable base, and may belie the true state of the economy, QuantEco’s Singhal cautioned. Already, one can see the core output numbers which showed a whopping 56 per cent growth in May, she pointed, adding the numbers from here on need to be carefully read.DK Joshi, Chief Economist at CRISIL concurred. The slow pace of vaccination, coupled with expectations of the gradual opening of the economy could mean the recovery back may take some time, Joshi said.

We are living in an uncertain environment, and can’t predict exact growth till we cover substantial ground on the vaccination front. We need to see how quickly and effectively we vaccinate our population… Also, the lockdown this time may be less harsh but seems more prolonged, and restrictions will disappear only gradually. This is likely to have adverse implications for the economy.Crisil Chief Economist DK Joshi told ETCFO

The services sector–mainly the likes of hospitality, aviation, and tourism–will have to wait for recovery a little longer, he said.

CRISIL’s Joshi also agreed with QuantEco Research’s Singhal that low base needs to be discounted for while reading future quarterly numbers, saying both sequential and yearly momentum needs to be read together.

The low base is favourable as the Indian economy contracted a record 24.4 per cent in the Q1FY21. The economy was badly hurt during the same period last year after the nationwide lockdown for over a month brought all the economic activities to a halt, keeping only essentials running.

Expenditure trends

Experts feel the government spending would mainly drive the economy in the relatively weak demand environment and private investments.

“I expect the government to continue spending in a major way. If it frontloads public expenditure in H1, that will be a huge support to the low-income groups, and will significantly boost consumption revival,” QuantEco’s Singhal said.

Kunal Kundu, economist with Societe Generale, presented a similar outlook.

While real non-government GDP contracted by 1.1 per cent in Q4FY21, the massive 28 per cent increase in government consumption expenditure was the most important driver of growth. Even public capex was quite strong, which enabled Gross Fixed Capital Formation (GFCF) to rise by nearly 11 per cent. Public capex especially in roads and railways have enabled a major turnaround in the activities of the construction sector.Societe Generale economist Kunal Kundu

With regard to major expenditure trend, demand, which constitutes more than 50 per cent of the economy, Kundu wasn’t much optimistic, giving a sense that pent-up demand following the unlocking whenever happens, is not going to significantly change the direction of the economy.

“Subsequently, the second wave would have pushed many more millions below the poverty line and many more below middle-class level of income as costly health events spiralled out of control. Hence, we are less confident of the multi-quarter positive impact of pent-up demand as households prepare to repair their balance by resorting to higher precautionary savings,” he signed off.

The finance ministry does not see a huge impact of the second wave on the growth revival, said its chief economic adviser K V Subramanian following the release of Q4 GDP numbers. The government has stuck to its 11.5 per cent growth projection for now despite the new virus. The Indian economy contracted 7.3 per cent in the just concluded financial year 2020-21.

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