Revival pangs

The third quarter FY21 GDP growth number and second advance estimates for the full year point to India’s economic recovery gaining speed. After struggling through a 24.4 per cent contraction in Q1 and 7.3 per cent in Q2, the economy shed the Covid-induced languor to manage a 0.4 per cent growth in Q3. While agriculture growth at 3.9 per cent did prop up the numbers, industry going from a 3 per cent shrinkage to a 2.7 per cent growth also boosted growth. The 7.3 per cent growth in utilities and a surprise 6.2 per cent expansion in construction are positive lead indicators to expansion in the core sectors and employment. Silver linings emerged in services too, with financial services and real estate expanding after deep contraction earlier. The revival would have been stronger but for the continuing cutbacks in public administration expenses. But the private sector picking up this slack suggests a welcome improvement in the quality of growth, as it is now less dependent on the crutches of government spending. The second advance estimate predicts an 8 per cent GDP contraction for FY21 versus 7.7 per cent earlier, mainly attributable to a technicality on subsidies. GVA projection for a negative 6.5 per cent instead of 7.2 per cent reinforces the picture of an economy on the mend.

Expenditure-based slicing of GDP flags the weak points in the revival though. While all three key legs of the economy have shown sequential improvements, it was Gross Fixed Capital formation (GFCF) surprisingly, that showed the most improvement (it grew 2.5 per cent in Q3 from a 46 per cent shrinkage in Q1). The Centre re-purposing its expenditure from revenue to capital spending seems to have driven this turnaround, with record low borrowing costs and frenzied de-leveraging by India Inc playing along. This shows that the Centre’s decision to focus its stimulus efforts on infrastructure building while leaning on the RBI to continue with easy money, is paying dividends. What could spoil the party though is the recent spike in global yields, which could prematurely reverse the low-rate regime in India and stall foreign capital flows flooding into India via the FPI and FDI routes.

Continued contraction in private consumption (down 2.3 per cent) presents a worrying counter-point to the otherwise positive data. Shrinkage in aggregate spending in a festival quarter — at odds with strong sales numbers put out by branded consumer firms — suggests that while the creamy layer of the population employed in the organised sector has perhaps resumed spending, the informally-employed/self-employed are still grappling with impaired purchasing power. The sharp dichotomy evident between the muted GDP numbers and India Inc’s 40 per cent profit rebound in Q3, also suggests that the recovery is perhaps leaving MSMEs and the informal sector behind. Policymakers must collate credible data on the latter and keep the powder dry for a demand stimulus in future, should the need arise.