Q3 GDP: Indian Economy Returns To Growth In October-December Quarter
Pent-up demand, festive spending and a jump in government expenditure helped bring back growth in the Indian economy after two consecutive quarters of contraction.
Gross domestic product rose 0.4%, in real terms, in the October-December quarter of 2020-21 over a year ago, compared to a revised contraction of 7.3% in the previous quarter, showed data released by the Central Statistics Office on Feb. 26.
GDP at nominal prices is estimated at Rs 54.56 lakh crore, showing a growth of 5.3%.
In gross value added terms, the economy grew 1% in the third quarter of the ongoing financial year.
A Bloomberg poll of 26 economists had estimated Q3 GDP growth at 0.5%. GVA was estimated at 0.7% according to 13 economists.
With GDP and GVA growing again the third quarter, the pandemic-induced technical recession in India has ended, said Aditi Nayar, principal economist at ICRA. The big surprise in terms of the sectors of production is the healthy expansion in financial, real estate and professional services, and construction, she said.
Rahul Bajoria, chief India economist at Barclays, said the gap between headline and core GDP, excluding agriculture and government spending, closed further, with core GDP contracting only 0.2% in Q3FY21. That indicates that private sector activity is now broadly growing in sync with the increase in fiscal support, which broadened beyond welfare spending and transfers during the quarter, he said.
Most sectors, except mining and trade, grew in the third quarter on a yearly basis.
Agriculture grew at 3.9% in Q3 compared to 3% in Q2.
Mining contracted 5.9% in Q3 compared to a contraction of 7.6% in the last quarter.
Manufacturing grew 1.6% in Q3 after a fall of 1.5% in the preceding quarter.
Electricity and other public utilities grew 7.3% against a growth of 4.4% in Q2.
Construction grew 6.2% in Q3 compared to a drop of 7.2% in Q2.
Trade, hotel, transport, communication contraction stood at 7.7% compared to a contraction of 15.3% in the previous quarter.
The financial services sector grew 6.6% compared to a contraction of 9.5% in the last quarter.
The public administration segment contracted 1.5% in Q3 after a contraction of 9.3% in Q2.
Also read: India Q3 GDP: Economists’ Take
Expenditure trends show government and private consumption expenditure continued to contract in the third quarter. The continued contraction in government expenditure was contrary to economist expectations.
Private consumption, reflected in private final consumption expenditure, contracted 2.3% in Q3 compared to a contraction of 11.3% in Q2.
Investments, as reflected by gross fixed capital formation, grew by 2.5% in Q3, after a contraction of 6.8% in Q2.
Government final consumption expenditure contracted by 1.1% in Q3, after a contraction of 24% in Q2.
The sharp pickup in the capital spending of the Government of India has spurred the growth in gross fixed capital formation in Q3, even as state government capital spending contracted, and private sector participation remained uneven and subdued, Nayar explained. Despite the pickup during the festive season, private final consumption expenditure continued to contract in Q3 FY2021, and trailed the performance of investment and government spending, she added.
Despite the revenue spending of the central and the state governments recording a growth in Q3FY21, the government final consumption expenditure component of GDP displayed a mild contraction in Q3, Nayar said.
Government expenditure as a percentage of GDP in nominal terms declined to 10.6% — the lowest in the three quarters of the ongoing financial year. The share of private consumption was at 60.2%, while investments stood at 27.7% of the GDP. Overall, private consumption is expected to lead the recovery, aided by high levels of public capex spending, Bajoria said.
Full-Year Contraction Deeper
For the ongoing financial year, GDP is estimated to contract 8%, according to the second advance estimates released on Friday. That's worse than a forecast of 7.7% contraction in the first advance estimates released at the end of January. Latest data show a sharper contraction in the first quarter at 24.4% versus the earlier estimate of 23.9%, whereas the second quarter contraction has been revised to 7.3% from the earlier 7.5%.
The downgrade to growth forecast by CSO is a bit surprising, said Kaushik Das, India chief economist at Deutsche Bank Research. He put it down to expectations of sharply higher imports growth relative to exports growth in Jan-March 2021. “...but in our view, the sequential momentum in various other components and a particularly supportive base in March 2021, will help to deliver a 3-3.2% y-o-y real GDP growth in Jan-March 2021, leading to a better outturn than the CSO’s estimate at this stage.”
The second advance estimate for FY2021 implicitly indicates a moderate improvement in GVA growth to 2.5% in the fourth quarter. GDP is projected to slip back into a contraction of 1.1%, which may be an unintended consequence of the back-ended release of government subsidies, according to Nayar. Though, various lead indicators have recorded a loss of momentum so far in Q4, in contrast to the improvement in sentiment brought on by the vaccine rollout, she added.
“We expect consumption growth to strengthen only modestly in the near term, as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self employed.”
In nominal terms, GDP is estimated at Rs 195.86 lakh crore—a contraction of 3.8%.
(Corrects an earlier version that misstated public administration grew in Q3.)
Watch | JP Morgan’s Jehangir Aziz and Barclay’s Rahul Bajoria discuss GDP data