Q1FY22 GDP growth propped by base effect but still has silver linings: Madhavi Arora of Emkay

The GDP growth rose a material 20.1 percent YoY in Q1FY22 (Emkay: 21.3 percent, Consensus:21 percent) with Real gross value added (GVA) growth at 18.8 percent (Emkay: 19.2 percent Consensus: 19.6 percent), led by pandemic-induced low base effects, but was also marked by lower-than-initially-expected economic losses from Covid-II. Most leading indicators and robust corporate results hinted at decent annualised gain in growth momentum, while the sharp sequential contraction (-13 percent QoQ, nsa) likely reflected the impact of localised restrictions due to Covid-II. Nominal GDP was at 31.7 percent. Amid robust net taxes in Q1FY22, the yawning gap between GDP and GVA growth seen in FY21, has finally reversed.

Supply side shows across-the-board improvement in Q4FY21 with services growth now positive

The pickup in Q1 GVA growth expectedly largely led by robust manufacturing (49.6 percent) and construction (68.3 percent), which was largely a global phenomenon as well. Services remained a laggard bearing the brunt of Covid. Utility demand remained strong (14.3 percent) as power consumption rose above pre-pandemic levels, while fuel consumption improved. Within services, financial and real estate grew 3.7 percent, and public admin service (part proxy for government spending) improved 5.8 percent yoy but contracted sequentially amid slower government’s revex. Trade, hotel, T&C also improved to 34.3 percent, but saw maximum negative sequential impact amid restricted mobility. Private sector GVA growth made impressive gains of 25.2 percent (4.1 percent prior). Agri sector continued to support the economy growing 4.5 percent (3.1 percent prior).

Expenditure side reflects private consumption remains the key contributor

By expenditure, private consumption remained a key contributor, growing 19.3 percent, contributing around 10.7 percentage points contribution, while government consumption contracted 4.8 percent possibly led by lower public spending. Government spend this year would likely be in the form of transfer/subsidies payments, with no material contribution to GDP. Meanwhile, GFCF was robust at 55.3 percent. However, valuables rose exorbitant 456 percent, partly reflecting some adjustment in capital formation while estimating quarterly GDP. Net exports drag reduced sequentially as exports grew better than imports.

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Madhavi Arora

Lead Economist|Emkay Global Financial Services

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Raising FY22 growth further by 110bps to 10.1 percent

Clearly, factors such as better adapted firms and policy response, stable financial conditions and robust global growth spillovers have created growth buffers back home. The catch up in the vaccine drive will further help the delinking between mobility and virus proliferation ahead and aid the pick-up in contact sensitive services sector. We revise up our GDP growth to 10.1 percent but it may still be around 5-6 percent lower than the pre-pandemic expected growth path. We reckon the nascent recovery ahead may partly still be led by capital and profits and have traces of scarring and segmented labour market and sub-optimal effective fiscal policy stimulus. However, exogenous demand drivers in the form of exports and sustained government capex will need to create a growth bridge till private investment and consumption recover optimally. To policymakers’ credit, a public investment push appears key to their growth revival strategy. Policy support in the form of physical and social infra outlays will have large multiplier effect on jobs (even for the bottom of the economic pyramid) and eventually catalyze private investment. This, in conjunction with initiatives like sustained privatization, tax reforms, expenditure re-alignment will likely create fiscal space to fund public investment.

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