India Q3 GDP Preview: A Return To Growth
A worker walks along the dock as materials are unloaded from a ship, not pictured, at Krishnapatnam Port in Krishnapatnam, Andhra Pradesh, India (Photographer: Dhiraj Singh/Bloomberg)  

India Q3 GDP Preview: A Return To Growth

The Indian economy is likely to have returned to growth in the October-December period after two consecutive quarters of contraction. Data for the gross domestic product due on Feb.26 is expected to show a return to year-on-year growth. albeit of a small magnitude.

According to median estimates of 10 economists polled by Bloomberg, GDP is estimated to grow 0.5% in the third quarter of the current financial year. Gross value added is expected to grow by 0.7%. In December, the Reserve Bank of India forecast GDP growth of 0.1% in the October-December period.

For the full year, GDP is estimated to contract by 7%, according to a Bloomberg poll of 8 economists. The first advance estimates had forecast a 7.7% contraction in GDP. The Indian economy contracted 24% year-on-year in the April-June quarter and by 7.5% in the July-September period.

Encouragingly, almost all the non-agricultural lead indicators recorded a continued, albeit uneven, improvement in volume terms in Q3 FY21, said Aditi Nayar, principal economist at ICRA. This pickup benefitted from the continued unlocking of the economy, uptick in consumption during the festive season, as well as higher central government spending, she said.

Most of the tracked indicators returned to growth on an annual basis in the October-December quarter, although this was on the low base of Q3 FY20, Nayar said. ICRA forecasts GDP to rise by 0.7% in Q3 FY21, with a pickup in private consumption and government spending likely to lead the recovery.

Out of the 41 high-frequency lead indicators in the nowcasting model developed by the State Bank of India, 51% are showing acceleration, said Soumya Kanti Ghosh, group chief economic advisor at the bank. The corporate results so far also reinstate the fact that Q3 would be much better than Q2, with a growth of 14.7% in the corporate GVA of 1129 companies in Q3 compared to 8.6% in the previous quarter.

As such, GDP growth for Q3 would be around 0.3% with an upward bias, according to a forecast by Ghosh. For the full year, SBI revised its forecast to a contraction of 7% compared to an earlier prediction of a 7.4% fall in GDP. However, Ghosh cautioned that all projections are conditional on the pace of new Covid-19 infections remaining in check.

India Q3 GDP Preview: A Return To Growth

Key Components Of GDP

Recovery is likely to be led by industry which is estimated to grow by 2.1%, according to ICRA’s estimates. Government incentive schemes could see output improve in the coming months, according to Barclays, which forecasts the sector to grow by 6% in the third quarter.

Agriculture and allied activities are estimated to remain steady, growing by 3.5%, according to ICRA. Barclays estimates the sector to grow by 4% aided by abundant monsoon rainfall and record sowing.

Services is likely to contract by 1.1%, according to ICRA’s estimates. Trade and commerce is estimated to see the sharpest contraction as contact-intensive sectors continue to face anaemic demand conditions. While trade and commerce is estimated to contract by 10%, financial services is estimated to contract 4% after liquidity support from the central bank and regulatory easing helped keep the flow of funds high, said Barclays.

A significant change is seen in government spending support. As revenues picked up, government spending started to rise in the third quarter.

The upswing in the services sector (excluding construction) will be led by government spending, with public administration, defence and other services likely to grow by 10% year-on-year compared to a 12.2% decline in 2Q FY21. Revenue expenditure (net of interest) was up 24.6% year-on-year in Q3 FY21 compared to a 9.9% decline in Q2 FY21. 
Teresa John, Economist, Nirmal Bang Institutional Equities
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