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Moneycontrol Pro Weekender | Shrinking less rapidly

The better-than-expected GDP print is good news, but India’s growth was lower than most of the major economies in the September quarter

November 28, 2020 / 10:38 AM IST

Dear Reader,

The economy shrank less than expected in the June-September quarter. Real GDP contracted by 7.5 percent, much better than the RBI’s ‘nowcast’ estimate of 8.6 percent made earlier this month and a huge improvement from the 23.9 percent contraction of the previous quarter.

How did it manage this feat? The obvious reason for the rebound is that the lockdown was slowly eased during the September quarter. Nevertheless, private consumption contracted by 11 percent from a year ago, government consumption fell 22 percent, gross capital formation was down 8.9 percent. What supported GDP growth was the surplus from foreign trade and that was because imports fell far more than exports.

The sectors that saw positive year-on-year growth were agriculture, ‘electricity, gas and other utilities’, while manufacturing saw marginal growth of 0.6 percent. The rebound in manufacturing was widely expected, given that the operating profits of listed companies grew sharply from a year ago, thanks to cutting costs. The government uses the profits of these companies for estimating value-added in the entire manufacturing sector, although conditions in the informal sector are very different. There was also a positive base effect, as manufacturing had slipped into contraction in the September 2019 quarter.

What stood out was that the rebound in the economy had very little help from the government sector. In fact, ‘public administration, defence and other services’ saw a contraction of 12 percent from a year ago, thanks to the stretched finances of both the Centre and the states and the reluctance of the Centre to provide a substantial spending boost. Government consumption expenditure was down 22 percent in the September quarter, compared to growth of 16 percent in the June quarter.


Rather surprisingly, the ‘financial services, real estate and professional services’ sector, which contracted by 8 percent in the September quarter, did even worse than its 5 percent contraction in the previous quarter.

The better-than-expected GDP print is good news, but, as the chart shows, India’s growth was lower than most of the major economies in the September quarter.

Real GDP Countries MC 27112020

The GDP numbers are backward looking and all that they tell us is the size of the hole out of which the economy has to climb. The December quarter will be buoyed by festival demand, but the big question is to what extent that demand is sustained. As our recovery tracker shows, the economy may be getting a bout of the post-festival blues. The global picture too is clouded, as the Flash PMIs for November show and as another COVID-19 wave engulfs some countries. On the other hand, the progress on the vaccines injects hope into the global economy.

Of course, not every section of society experiences the same rate of growth. As we pointed out this week, India is a two-speed economy, with one growth rate for the top 10 percent and another, much lower one, for the rest.

The recovery and pent-up demand theme continued in some of our stock picks, Trent being one example, these gas distribution companies another. Petronet and Power Grid echo that narrative, as do these housing finance companies. Even construction companies are getting back on their feet and we spotted some bargains there. After a decent run, the cement industry faces its post-festive demand test. And Dabur CEO Mohit Malhotra told us how the tide turned for the company in the September quarter.

The government’s focus on import substitution may be criticised for being Protectionism 2.0, but that doesn’t mean we can’t profit from it. This week, we recommended this play on import substitution.

An RBI internal working group proposal to throw open banking to industrial houses led to a huge amount of controversy, particularly because of this rather curious reasoning in the report. We analysed in detail how Indian banking would change if that happened. Some of the other proposed changes would sweeten the outlook for the holding companies of Ujjivan and Equitas small finance banks.

Among other picks, we took a look at Bharat Electronics and others from the defence industry.

The current global environment of ultra-low interest rates has led to questions about what could be the right investment strategy for such times. Japan being the pioneer of zero interest rates and quantitative easing, it’s no wonder that much attention has been focussed on how it coped and what Mrs Watanabe can tell us.

Here’s a thought about what Tesla’s astounding run could possibly signify, while Janet Yellen prepares for her second act at the pinnacle of US economic policy making.

During the week, markets continued to march higher, secure in the knowledge that the Fed believes stock valuations are perfectly justified.


Manas Chakravarty
Manas Chakravarty
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