Q2 GDP: Gross fixed capital formation rate rose in July-September despite COVID-19 second wave

India’s gross fixed capital formation (GFCF) expanded 11 percent year on year to Rs 11,429.07 billion in the July-September quarter of FY22, according to the National Statistical Office’s estimates.

The rise in GFCF, the second-largest component of gross domestic product (GDP), was despite the second wave of COVID-19 that had forced the country to implement localised lockdowns to contain the spread of the virus.

GFCF is often used as a proxy for private investment, and includes resident producers' investments, deducting disposals, in fixed assets during a given period.

The July-September quarter also marks the first time when the country's GFCF has risen when compared to the corresponding quarter in FY20; GFCF went up by 1.5 percent.

The country's GFCF made up 32 percent of GDP in the July-September quarter of 2021-22, compared to 31.2 percent in the previous year and 28.9 percent in the second quarter of 2019-20, as per the data released by the National Statistical Office on November 30.

The country's GDP rose by 8.4 percent in the second quarter of 2021-22, largely because of the low base from the same quarter last year when a nationwide lockdown was imposed due to the COVID-19 pandemic and the government push for infrastructure investment since the start of the current financial year.

India's GDP had contracted 7.4 percent during the same period last year. This means that in absolute terms, the economic recovery has reached pre-pandemic levels.

Similarly, the country's GFCF, which denotes investments, in absolute terms came in at Rs 11,42,907 crore in July-September as compared to Rs 10,29,574 crore in the same period in 2020-21, and Rs 11,25,882 crore in the first quarter of 2019-20.

According to ICRA's Chief Economist Aditi Nayar, the 1.5 percent rise in GFCF in Q2 FY22 relative to Q2 FY20 is the lone silver lining in the GDP number for July-September.

“While the Q2 FY2022 absolute level of real GDP reverted mildly above the pre-Covid level of Q2 FY2020, the disaggregated data for Q2 FY2022 is far from convincing, with considerable lags in private and government consumption expenditure being absorbed by a sharp rise in valuables relative to the pre-Covid level of Q2 FY2020. The 1.5 percent rise in gross fixed capital formation in Q2 FY2022 relative to Q2 FY2020 appears to be the lone silver lining," Nayar said in a statement.

"With the discovery of the Omicron variant of Covid-19 reigniting uncertainty regarding the strength of global demand and cross-border flows, we are maintaining our estimate of a 9 percent growth in real GDP in FY22 for now, in the absence of concrete evidence regarding the durability of domestic demand," Nayar added.

CRISIL Research's Chief Economist Dharmakirti Joshi also said that the rise in GFCF was largely driven by the government's investment since the start of the current financial year in the infrastructure space.

"These investments continue to remain the key growth driver for the country's GDP, while private consumption is yet to show a decisive recovery," Joshi said.

Similarly, Care Ratings in its report following the GDP estimates said that the government’s capital expenditure has grown by 25.8 percent during April-October of the current fiscal over the corresponding period of FY20.

The government's capital expenditure reached Rs 2,53,270 crore between April and September of the current financial year when compared to Rs 2,01,273 crore in 2019-20, the rating agency noted.

However, when compared to the first quarter of the current financial year, the government's capital has slightly fallen from Rs 1,28,428 crore in April-June FY22 to Rs 1,24,942 crore in July-September.

Care Rating in its report added that the growth in capex can be ascribed to a notable increase in expenditure towards food and public distribution, road transport and highways, and railways. Capital spending has been lower towards defence by 6.7 percent, the rating agency said.

The central government has prioritised capital expenditure to boost economic recovery in India following the outbreak of the pandemic, as can be seen from its 34.5 percent increase in its planned capital expenditure for 2021-22 and the recently announced Rs 100 lakh crore Gati Shakti scheme.

Finance minister Nirmala Sitharaman on August 16 further emphasised that the government won’t trim capital expenditure from the budgeted level, as it banks on spending having a high multiplier effect to reverse a COVID-induced slump in growth.

The government in the past three quarters has increased spending on productive assets such as roads, ports, and factories to support economic recovery at a time when the capital expenditure of the country's private sector has been quite slow.

An analysis of the capex pipeline since the start of COVID-19 and in the previous two years by Nirmal Bang showed that private sector capex declined from Rs 12.2 lakh crore in 2018-19 to Rs 8.4 lakh crore in 2019-20 and further to Rs 6.6 lakh crore post-pandemic in the April 2020-July 2021 period.

The rise in GFCF seen in the past two quarters can also be seen as a confidence booster for the country’s private sector to follow the footsteps of the government and increase capex going forward, it said.