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Q2 GDP at -7.5% beats estimates, full-year surprise possible on govt spending, vaccine, RBI

Experts feel the GDP print for FY21 could see a contraction of 6-7.5 percent, much lower than current expectations of 10-11 percent

November 27, 2020 / 07:58 PM IST

The gross domestic product (GDP) print for the July-September period of 2020-21 at -7.5 percent was way ahead of analysts' expectations, hinting further recovery in the December quarter and positive numbers in the last quarter of FY21.

As a result, experts feel the GDP print for FY21 could see a contraction of 6-7.5 percent, much lower than current expectations of 10-11 percent.

The better-than-expected Q2 GDP data was largely driven by positive numbers in manufacturing (0.6 percent in Q2FY21 against -39.3 percent in Q1) and electricity (4.4 percent against -7 percent), and lower contraction in mining (-9.1 percent against -23.3 percent), construction (-8.6 percent against -50.3 percent), trade and hotels segments (-15.6 percent against -47 percent), though agriculture and services (flat at 3.4 percent QoQ) came in slightly lower than estimates.

Analysts more-or-less had estimated lower contraction in manufacturing due to a rise in pent-up demand after easing of lockdown measures, but positive numbers were a surprise. Even trade and hotels data was also surprising.

The average of estimates of economists polled by CNBC-TV18 was -8.9 percent for GDP in the second quarter, while GVA came in at -7 percent against poll expectations of -8.6 percent.

"September quarter GDP is much better than our upwardly revised -8.4 percent YoY. The uptick is driven by positive growth in manufacturing which was anticipated by us, but the sharp improvement in ‘trade, hotels & transportation’ is a surprise. Bunching up of demand in the September quarter has helped lift YoY growth. In addition, manufacturing has benefitted more from pent-up demand than high contact services," Prithviraj Srinivas, Chief Economist at Axis Capital, told Moneycontrol.

He believes personal safety and convenience is the root driver of discretionary demand in auto and durables in Q2. Auto sales data for last few months was quite strong amid festive season.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said: "The 0.6 percent expansion in manufacturing has come as a pleasant surprise. If this trend sustains Q3 contraction will be very low and Q4 will post positive figures. If so, the annual contraction can be around 6 percent."

"Sharp expansions in H1 FY22 is on the cards. A 'V' shaped recovery in FY22 is in the realm of possibility. It is important to sustain the growth momentum," he added.

During an interview with CNBC-TV18, Kshatrapati Shivaji, Chief Statistician of India, too, said the revival was indicating a V-shaped recovery in the economy which is on an encouraging trajectory.

"Manufacturing numbers are very encouraging and are better than pre-COVID levels. Electricity, gas and water supply growth demonstrated an encouraging recovery. Agriculture and allied services have done well, though only thing needs to be looked at is financial, real estate and professional services segment," he explained.

Industries witnessed a contraction of 2.1 percent in Q2FY21 against -38.1 percent in previous quarter, while services saw a contraction of 11.4 percent against -20.6 percent QoQ.

The contraction in private final consumption was also lower at -11.3 percent in Q2FY21 against -26.7 percent in Q1FY21, but government final consumption was at 22.2 percent against 16.3 percent QoQ.

Gross fixed capital formation saw a contraction of 7.3 percent, against -47.1 percent in the same period.

Hence, any significant surprise in full-year numbers with lower contraction is only possible if the government spending increases, experts feel.

"With the rapid pace of normalisation of the economy, is it clear that the size of unaffected parts of the economy is far greater than stressed sectors. Momentum in the recovery phase of the economy can be sustained by government spending, the vaccine, and monetary policy tailwinds. We see upside risk to our -10.3 percent full-year FY21 forecast. For e.g. if we extrapolate current GST collections and back calculate GDP from there we shouldn't be surprised if full-year FY21 GDP is closer to -6 percent YoY," Prithviraj Srinivas, Chief Economist at Axis Capital, said.

The GST collection in the month of October surpassed Rs 1 lakh crore mark for the first time since February this year, coming in at Rs 1,05,155 crore against Rs 95,480 crore in September.

The benchmarks remained cautious about expected data points on November 27, but midcap and smallcap rally (of around 3 percent) seems to have anticipated the surprise. Even during the week, the Nifty50 gained 0.85 percent, but the Nifty Midcap index was up 4 percent and Smallcap rallied 6.3 percent.

"Smart Investors were anticipating this, which was evident in the sharp upmove this week in the Nifty Midcap 50 and Smallcap 100. Trading volumes on the exchange today was at record highs. The data is in sync with Q2 earnings and commentary put out by several corporates," S Ranganathan, Head of Research at LKP Securities, said.

On November 27, NSE cash segment also hit a lifetime high turnover of Rs 1,47,358 crore in a single day. It is higher from its previous record turnover of Rs 98,935 crore made on August 31, 2020.

Hence, experts expect the market to witness gap opening on December 1.

"The Q2 GDP numbers came in at a big positive surprise. Manufacturing growth has come in much stronger than expected. This will entail revising downward the full year GDP contraction forecasts. The key thing to watch out for is the time services will take to come back to normal and whether manufacturing growth reflects restocking/pentup demand or is reflective of normal demand conditions which have revived sustainably. Equity markets could open higher on Tuesday reflecting the positivity of the Q2 GDP numbers," Dhiraj Relli, MD & CEO at HDFC Securities said.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

Sunil Shankar Matkar
first published: Nov 27, 2020 07:58 pm