Strong Demand Keeps India on Path to World’s Fastest Growth

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The economic toll from a deadly second wave of Covid-19 outbreak in India last quarter wasn’t as bad as feared, with the nation still very much on track to achieving the world’s fastest growth this year.

Early signs of it appeared in the economy’s fiscal first-quarter numbers published by the Statistics Ministry Tuesday, which showed gross domestic product advancing 20.1% in the three months to June from a year ago. That was in line with the median forecast for a 21% expansion in a Bloomberg survey of 45 economists. 

The rebound is mainly on account of last year’s crash and the numbers mask a sequential hit to the economy as a result of activity curbs to stem the virus’s spread. Although the government doesn’t report an official quarter-on-quarter figure, a quick calculation shows output contracted about 17% from the January-March period.

Still, the year-on-year data underlined demand resilience, with private consumption continuing to account for 55% of the economy’s growth.

“The print shows that the economic cost of the virulent second Covid-19 wave was much lower than the first,” said Gaura Sen Gupta, an economist with IDFC First Bank Ltd. “Details reveal a K-shaped recovery with much stronger growth in industries and muted growth in services,” she said.

A better-than-expected manufacturing performance and a milder hit to services, combined with a robust pace of vaccinations, also helped keep the annual growth outlook for the economy steady at 9.2%, according to a Bloomberg survey. That pace will be the quickest among major economies, surpassing China’s 8.5%.

The rupee completed its biggest monthly gain since May before the data was released, while stock indexes hit a new high amid optimism about the economy’s strong recovery. Bonds were up slightly.

Latest high-frequency data showed the impact of pandemic restrictions were less severe than last year, enabling demand to recover quickly in the consumption-driven economy. Loans for consumer durables and vehicle purchase, as well as to real estate and small businesses, grew in July, both in terms of month-on-month and from a year earlier, data published by the Reserve Bank of India showed.

What Bloomberg Economics Says...

“The localized approach to contain the second Covid wave allowed essential activities to continue and partially cushioned the economic blow. Growth should pick up pace with further reopening in the current quarter.”

-- Ankur Shukla, India economist

For the full report, click here

That’s backed by optimism of factory managers in India, who saw a surge in activity in July amid a pick up in new orders, while a similar survey of services’ purchasing managers showed the sector was inching back toward expansion. Exports, which account for nearly a fifth of the economy, have been growing for the past eight months signaling strong global demand. 

“There is a recovery,” said Shubhada Rao, founder at QuantEco Research in Mumbai. “In most of the indicators, we are higher than pre-pandemic levels.”

The improved showing coincides with India’s vaccination rate picking up pace over the last few weeks. And there’s room for further improvement, given that the country has managed to inoculate only just over 10% of it’s population -- a key vulnerability given risks from a possible third wave of infections.

The threat from the pandemic has kept the nation’s central bank from unwinding its ultra-easy monetary policy, with Governor Shaktikanta Das reiterating that policy makers wouldn’t reverse course suddenly despite mounting inflationary pressures.

Prime Minister Narendra Modi plans to complement the monetary stimulus with fiscal measures. His government aims to raise 6 trillion rupees ($81.9 billion) by leasing out state-owned infrastructure assets over the next four years to fund new capital expenditure without further widening the budget deficit.

©2021 Bloomberg L.P.