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India's GDP growth may slow down to 6.2% in December quarter on lack of base effect

With the favourable base effect waning, India's GDP growth is likely to have come down further in the last quarter of 2021. While growth may have gained some momentum, economists are not convinced by the outlook

February 25, 2022 / 02:24 PM IST

The Indian economy seems to have grown at a slower pace of 6.2 percent during the last quarter as a favourable base effect has waned.

The data for India's Gross Domestic Product (GDP) for October-December 2021, scheduled to be released by the Ministry of Statistics and Programme Implementation at 5:30pm on February 28, would reflect that the economic growth has slowed down, according to a Moneycontrol survey of 10 economists.

This would be down 40 basis points from the Reserve Bank of India's  forecast of 6.6 percent  growth, made in December 2021. The central bank did not spell out the forecast for October-December 2021 in the latest resolution of the Monetary Policy Committee, released on February 10.

Buoyed by a low base, India posted impressive growth numbers for the first two quarters of FY22. From 1.6 percent in January-March 2021, the GDP growth rate jumped to 20.1 percent in April-June 2021 before falling to 8.4 percent in July-September 2021.

This is expected to have fallen further in the third quarter as the economy exited a technical recession in the corresponding period of FY21.

Despite a lower growth rate, economists say economic momentum strengthened by the end of 2021.

"All of the key sub-sectors will record growth, and we see some momentum spilling over in Q1 2022. We see scope for steady agricultural sector growth, even though there are clear signs of weakness in rural-consumption data. Growth was slower in mining, construction and manufacturing, partly on account of supply chain disruptions, especially for the auto sector," said Rahul Bajoria, Chief India Economist at Barclays.

Bajoria expects the GDP growth to come in at 6.6 percent for October-December 2021.

Shortages for key components such as semiconductors and coal saw industrial activity take a hit towards the end of 2022. Industrial growth, as measured by the Index of Industrial Production, slid to 4.4 percent in September 2021 from 13 percent the previous month and has since fallen even further to 0.4 percent in December 2021, although some of this slowdown can be attributed to the dissipation of a favourable base effect.

While the industrial sector faced disruptions, services activity likely picked up pace last quarter as "rising vaccine coverage and confidence levels instigated a cautious revival in the contact-intensive sectors", according to Aditi Nayar, ICRA's Chief Economist, who estimated the GDP growth rate at 6.2 percent.

However, the onset of the rapid Omicron-variant led third COVID-19 wave in the last week of 2021 adversely impacted mobility again. Any hit to growth from the third wave, while seen as muted, will mostly be captured in the data for the current quarter, which will be released at the end of May 2022.

The rising growth momentum was captured by Motilal Oswal Financial Services' monthly Economic Activity Index, which said year-on-year growth rose to a three-month high of 5.1 percent in December 2021 from 1.9 percent the previous month. A break-down of the monthly numbers suggests that consumption growth slowed down marginally in December 2021 from the previous month, thanks to a fall in government consumption.

On the other hand, investments have probably grown sharply, supported by public capital expenditure. Overall, the growth outlook remains "largely lacklustre", according to Nomura.

"Most sectors plateaued in December, and remained below the pre-pandemic levels (particularly consumption and services)," Nomura said in a note on February 18. It expects the October-December 2021 GDP growth rate at 6.3 percent.

Siddharth Upasani
first published: Feb 25, 2022 02:24 pm