What Q2 GDP Data Tells Us About The Economy
How much did growth strengthen in Q2? What segments led and what lagged? And what is the outlook?
The Indian economy recouped much of what it lost in the April-June quarter over the next three months as Covid cases fell and states eased restrictions. With that, output moved back to the pre-pandemic levels but remained below what it would have been had the pandemic not hit at all.
The scars of the pandemic are visible in the relatively weak rebound in consumption so far, even as government spending and strong exports are helping the economy rebound. A strong agricultural sector has helped as well.
These are some of the key takeaways from economists following release of data for the second quarter, which showed GDP growth at 8.4% and gross value added growth at 8.5%.
Economy Rebounded Following Second-Wave Hit
The economy grew 29% on a quarter-on-quarter, seasonally-adjusted and annualised basis, said JP Morgan chief economist Sajjid Chinoy in a note. This is on the back of the 28% contraction in the previous quarter characterised by a vicious second wave.
The dynamic that underpinned this is a faster reopening of the economy, Chinoy said. While the economy is close to pre-pandemic levels, the gap is wider in the case of core GVA, which adjusts for agriculture and government spending, he added.
According to Sonal Varma, chief India economist at Nomura, the 6.6% seasonally adjusted quarterly growth reflects a swift rebound from the second wave lows.
The fastest normalisation is seen in exports and investments on the demand side, and agriculture and industry on the supply-side—all of which are above their pre-pandemic levels.Sonal Varma, Chief India Economist, Nomura
But Consumption Remained Weak
Consumption remains a relative weak spot in the economy.
On a sequential basis, private final consumption expenditure rose 9.2%, recouping in part the strong 17.4% contraction in Q1, said QuantEco Research in a note. The steady improvement in personal mobility allowed for a build-up in consumer confidence and allowed contact services to rebound, it added.
However, private consumption has lagged investment, exports and imports, said Chinoy. "This is consistent with our long-standing view that the income scarring from the pandemic—still visible in the labour market—is likely to weigh on consumption once pent up demand is over."
Private consumption is 3% below its pre-pandemic level, while the hardest hit segment of 'trade, transport, hotel and communication' is still 9% below its pre-pandemic level, reflecting the uneven recovery, said Varma of Nomura.
Government Spending Boost To Investments
What is helping the economy is government spending, which is underpinning a recovery in investments. Strong exports, too, have been a support.
Investment saw a strong 11.8% quarter-on-quarter expansion, led by improvement in production of capital goods, infrastructure and construction items, and continued support from public capex as central government capital spending grew 51.9% year-on-year in the second quarter, said QuantEco Research.
Gross fixed capital formation is next at 103% of the pre-pandemic levels due to strong government capex, said JP Morgan's Chinoy. "Over the last four quarters, central government capex growth has averaged 55% in nominal terms (48% in real terms when deflated by the GDP deflator) versus gross fixed capital formation growth of 16%," he said.
Therefore, even as central capex is a small fraction of gross fixed capital formation, its strong growth is responsible for a meaningful fraction of investment growth, Chinoy said.
Q3, FY22 & Beyond
The reopening reflected in the second quarter and continued in the third quarter, suggesting that growth may remain strong.
As a result, JPMorgan has marked up its fourth-quarter growth estimate to 25% quarter-on-quarter, seasonally adjusted annualised. Growth in the full fiscal year is estimated at 9.6% over a year ago.
Nomura believes that the outlook may be clouded by supply-side bottlenecks bogging down production, alongside signs of weakness in demand for mass consumption goods. "We expect continued economic normalisation in coming quarters, albeit with lower momentum, and retain our FY22 GDP growth projection at 9.2% year-on-year," said Varma of Nomura.
The Omicron variant of the Covid virus has also imparted uncertainty to the outlook.
Beyond that, over the next few years, growth will be a face-off between the scars the pandemic leaves behind and some new growth drivers that have emerged, said Pranjul Bhandari, chief India economist at HSBC.
"The economic cost of inequality is the most visible scar that the pandemic is likely to leave behind. 80% of India's labour force is informal. About half of them, i.e. the non-agricultural informal labourers, have faced the brunt of the pandemic. The loss of their incomes could hurt future demand and thereby the growth prospects of the formal sector," she said.
Watch a conversation with Pranjul Bhandari of HSBC on the state of the economy below: