Q1 GDP | Divergent and uneven underlying growth will need nurturing

The Provisional Estimates for India’s Q1 FY22 GDP, released on August 31, showed that the economy grew by 20.1 percent YoY in the quarter. However, this outsized growth owes largely to a favourable base and the YoY comparisons will not leave us any wiser. In fact, despite such a high YoY growth Q1 FY22, GDP was 9.2 percent lower than the levels seen in Q1 FY20.

Sequential comparisons are more relevant given the current backdrop, and actually do reveal the hit to the economy on account of the COVID-19 second wave. The GDP contracted by 16.9 percent in Q1 vis-à-vis Q4 FY21. While the GDP typically contracts in Q1 on a QoQ basis every year due to seasonality, the extent of contraction in Q1 FY22 is quite large compared to the average of ~3-4 percent fall seen over the years. The hit is visible across segments, and is outsized in the case of the services segment (Q1FY22: -11.8 percent QoQ vs Q1FY16-20 avg: +8 percent QoQ).

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One must tread with caution while deciphering trends in India’s economic recovery. This is because the recovery in the GDP numbers and underlying economic activity during last three quarters (notwithstanding the hit to activity in Q1FY22 due to the second wave) has largely been supported by demand spillovers. This accumulated temporal demand has steepened the slope of the recovery; underlying activity excluding this carryover still remains weak and the slope is likely to flatten quickly once this pent-up demand is exhausted save for government interventions in the ensuing quarters.

So, for instance, private consumption (PFCE) in Q1FY22 is 11.9 percent lower than Q1FY20. As highlighted earlier, this weakness relative to FY20 levels can be largely attributed to the second wave of infections, given that the PFCE had exceeded Q4FY19 levels in Q4FY21 and the Q1 numbers are a reversal on this account. However, the recovery in the PFCE in H2 FY21 was also aided by pent-up demand and revenge consumption; given this, one does not rule out that some exhaustion is also likely to have set in and may have contributed to a fizzling out of consumption demand in Q1. Consumption-related high frequency indicators and commentary for Q2 will need to be scrutinised closely on this account.

Second, the recovery is not broad-based, it is besieged with multiple divergences (k-shaped) which raises questions around its sustainability, and will need careful nurturing via policy support. There is a large gap between the recovery seen in manufacturing (goods) and services output, as is visible in the GDP numbers (shortfall in Q1 FY22 vs Q1FY20) and the PMIs. Even within manufacturing, the gap between labour-intensive IIP and capital-intensive IIP has intensified to ~35 percent in the post-pandemic period from ~15-20 percent during FY18-20.

There is a stark dichotomy between consumer and business sentiments. While business sentiments have seen a sharp rebound, consumer sentiments continue to remain in deep negative territory. There are divergences between consumption of higher quality and inferior goods — growth in top three brands across FMCG categories has outpaced growth in the rest over the last 12 months. This is a significant reversal from the pre-COVID-19 times when smaller, especially regional brands were gaining market share. Even in the case of durables, the SUV segment has done better than the small car segment which in turn has outperformed the two-wheeler segment.

Divergences are visible in the position of the richer and poorer households also. While the rich and upper middle-class households have benefitted significantly from forced savings and the asset price boom in the recent months, the poorer households have suffered the most. In the case of businesses also, the formal sector has outperformed the informal segment, which was hit disproportionately.

Finally, the provisional GDP estimates may be underestimating the extent of scarring in the organised as well as unorganised sector on two accounts. The provisional estimates of several segments in the GDP are based on small sample of companies that publish quarterly results (~4,400 companies). Data for the larger unlisted space, which is expected to have fared much worse than the smaller listed space, is only accounted for in future revisions. Besides, estimates for the unorganised sector, which was hit much harder than the organised sector during the pandemic, are computed using organised sector proxies. This could manifest in extremely divergent consumption patterns going forward.

Overall, the FY22 GDP growth estimates remain unchanged at ~9 percent with the ominous shadow of a potential third wave. However, we must remain mindful of the uneven and divergent nature of recovery along with below-the-radar scarring in the informal economy not being adequately captured in headline numbers that could impact the recovery and normalisation cycle.

(With inputs from Rahul Agrawal, Economist, M&M)

Sachchidanand Shukla is Group Chief Economist, M&M.

Views are personal and do not represent the stand of this publication.