Economy returns to growth in Q3 after two quarters of contraction

Economy

India’s gross domestic product (GDP) in the third quarter of FY21 rose marginally at 0.4 percent, in line with expectations, reaffirming that the economy had managed to exit the coronavirus pandemic-led slump by 2020-end, according to official data released by the National Statistical Office on February 26.

However, in FY21, the GDP is now expected to shrink by a slightly larger margin of 8 percent, according to the government’s updated official forecast. This is due to the rebound in growth for key sectors such as manufacturing, financial services and real estate being slower than expected earlier, economists say.

“Given the uncertainties around investments and exports, recovery prospects currently hinge critically on uptick in private consumption. Accordingly, one would expect support from public policy – both fiscal and monetary – will remain strong in the coming months,” Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank, said.

India’s economy had shrunk a massive 24.4 percent in the first quarter before contraction moderated to a less severe 7.3 percent during the second quarter. The latest figures for the third quarter show that the manufacturing sector grew by 1.6 percent in the third quarter of the year. The sector has cut down contraction from a massive 35.9 percent at the beginning of the epidemic in the first quarter to just 1.5 percent contraction by the second quarter.

The agriculture sector, which stood out as the only growing sector of the economy in the previous two sectors, continued its run to register a 3.9 percent rise in the latest quarter. Updated figures show it had grown by 3 percent in the second quarter.

Crucial consumer demand in the economy, measured by Private Consumption Expenditure continued to contract, falling by 2.3 per cent in Q3. However, the extent of contraction reduced from the second quarter when it had shrunk 11 per cent. “While the latest data is in line with estimates for a V-shape recovery for the economy. The private consumption data and an 8 percent contraction in GDP for FY21 are a cause of concern,” Nish Bhatt, Founder & CEO, Millwood Kane International, said.

On the other hand, government spending also fell in the latest quarter, reducing by a slight 1.1 percent. While this was much smaller than the 24 percent fall seen in the previous sector, the latest figures led to public sector spending now commanding just a 9.8 percent share of GDP. “Surprised with govt spending numbers. Most probably states spent less in Q3. We will have to see what were the drivers for investments in Q 3,” Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank, said.

GDP-in-FY21

Coming as good news to policymakers, Gross Fixed Capital Formation (GFCF), closely watched as an indicator for investment demand in the economy, came back to the growth charts with a 2.6 percent rise, after a long time. It should be noted that GFCF has been in the negative throughout the previous five quarters.

Going forward, economists said expectations of GDP growth during FY22 remained strong, partly reflecting a markedly favourable base but pointed out that the path for sequential growth can still be uneven and uncertain. In the forthcoming quarter, ratings agency Ind-Ra expects GDP growth to clock a lower 0.3 percent.

“The real push will come in Q4 2021, because lockdowns in many sectors, particularly hospitality and travel eased substantially during that quarter. However, it is important to note that the states coming under uptick in COVID-19 cases constitute large parts of industrial activity. That will be crucial for Q4 and the next financial year,” Sanjay Kumar, Partner, Deloitte India, said.

The government’s second advance estimates of GDP growth for FY21, released alongside the quarterly data, eliminated hopes of a less severe impact on the economy for the current financial year. The initial estimate of an annual contraction was 7.7 percent. India’s GDP had expanded by 4.2 per cent in 2019-20.