Concerns over future growth momentum despite GDP growth

The GDP growth of 0.4 percent for the Q3 FY21 reflects that there is a positive momentum in the Indian economy across sectors but there are concerns about a weak private consumption and the fear of a second Covid wave that may impact growth again in the Q4 of the FY21. Moreover experts feel that the growth in the quarter could be due to the pent up demand fueled by the festive period. Hence it would be important to see going forward at what level the economic growth momentum is sustained over the next quarter and the Q1 of the FY22.


“The revision in the Q3 FY20 of GDP growth by 140 basis point from 4.7 to 3.3 percent has led to the positive growth rate, without which India would have registered three consecutive quarters of negative GDP growth rate. This indicates that there is a certain amount of wariness about the pace of recovery in the fourth quarter of FY21. Most surprising is the contribution of government spending to the GDP during the Q3 which is a seven quarter low, even as the government’s stimulus package 3.0 was announced before the festive month. Private consumption demand, although improved, remains weak, also evident from the consumer confidence on spending in the RBI’s survey data. We expect that GDP for FY21 will decline by 8.0 percent in line with the government’s estimation,” remarked Dr. Arun Singh, Global Chief Economist, Dun and Bradstreet, India.


This expert also feels that there are many risks to growth as industrial production is yet to stabilize, core inflation remains stubbornly high, oil prices are rearing its head again and unemployment remains elevated. India also faces a risk from the spurt in rise of cases in some states and the likely disruptions to businesses and supply chains from the restrictions imposed to curb the possibility of a second wave.


The Q3 has also indicated a pickup in manufacturing, broadly in line with the improved performance of listed companies in the quarter and India could well be on track for a cyclical recovery driven by fiscal spending, global manufacturing rebound, potential real estate sector revival, etc. These are positives but there is not much clarity on the hit taken by the labour market and the informal sector in the country.


“India’s advance estimate of FY21 real GDP growth has been surprisingly revised down to -8 percent year on year from 7.7 percent. However, nominal GDP growth is estimated to be slightly better but both private and government consumption expenditure are now expected to grow lesser while investment growth is projected to be slightly better. This also implies financial, real estate and professional services and public administration, defence and other services are expected to grow lesser, while manufacturing recovery could be better,” observed Sreejith Balasubramanian, Economist- Fund Management, IDFC AMC.


During the quarter investments were the primary driver while consumption remained slow. Interestingly the CSO expects a contraction of 1.1 percent YoY in 4Q of the FY21, implying 8 percent fall in FY21.


“The trajectory of growth would depend to a significant extent on the efficacy with which the second wave of the pandemic is contained, if it happens, as appropriate growth supporting fiscal and monetary policies are already in place. There are sectors like education, hotels and restaurants and travel and tourism, which are yet to be open fully and there are short term lockdowns in several cities as of now. If it deepens further then Q4 growth may be impacted,” pointed out Joseph Thomas, Head of Research Emkay Wealth Management.


Experts feel that with the economy moving towards normalcy, most economic indicators have been improving in the last few months and hence the movement of third quarter GDP growth to the positive territory does not come as a surprise. As expected, the manufacturing sector has bounced back recording a positive growth. Strong revival in the construction sector has also boosted overall GDP growth. Among the service sectors, positive growth in financial services and the real estate sector bodes well for the economy.


“With the pent-up demand taken care of in the last few months, going forward it will be critical to see at what level the economic growth momentum is sustained. The government’s measures to support capital expenditure will help sustain growth in the medium to long-run. But for the near-term, acceleration in consumption spending would be important to propel India’s growth momentum. Increased threat of a second wave of Covid-19 infection in India would be a critical aspect to watch out for, as worsening of situation could have a huge bearing on consumer sentiments and spending.” remarked Rajani Sinha, Chief Economist and National Director – Research, Knight Frank India.