The Indian economy emerged from the technical recession of the first two negative growth quarters, clocking a positive gross domestic product (GDP) growth figure of 0.4% in the third quarter, signalling what economists and the government are hoping is the beginning of a V-shaped recovery in FY22. The government released the third quarter growth figures on February 26, and also said that the economy would end FY21 with an estimated contraction of 8%, slightly higher than the 7.7% estimated earlier.
The third quarter growth figure was largely on expected lines, with estimates pegging it at anywhere between 0.5% and 0.8%. The estimates stemmed from a strong start to calendar year 2020, where the January figures for a number of the high-frequency indicators gave confidence that the base had been built in the December 2020 quarter, and the economy was poised for a smart turnaround in FY22. The Economic Survey 2020-21 had also estimated a V-shaped recovery in FY22.
Here's Fortune India's story of February 25, a day before the third quarter figures were announced:
V for recovery: India set to return to growth path
The Indian economy seems ready to shake off the burden of the technical recession it finds itself in. By most accounts, the third quarter gross domestic product (GDP) growth figure to be announced on Friday will likely be a marginal positive, indicating that the economy is firmly on the road to recovery. If the high-frequency data which economists examine closely is anything to go by, there is a good chance that the economy would have returned to positive territory in the December 2020 quarter.
The Economic Survey 2020-21 had expressed confidence that the Indian economy is poised for a smart V-shaped recovery, which will carry it through to a double-digit growth figure of 11% in real GDP, which would be the highest since Independence. Advance estimates by the National Statistics Office (NSO) have pegged the FY21 GDP at -7.7%. This, the Survey had pointed out, was a sequential growth of 23.9% in the second half of FY21, over the first half of the fiscal. In the first quarter of FY21, India had slumped to a disastrous 23.9% contraction as the Coronavirus-induced lockdown took a toll on the global economy. This was followed by a contraction of 7.5% in the second quarter.
While a section of economists argue that the recovery may not be a V-shaped one, given that some segments continue to be under stress, the majority of economists, though, believes there is a good chance of a smart upturn in growth.
A Bloomberg report put out a day before the growth figures are to be announced also says that India is likely to have exited the recessionary phase in the December quarter, with two of the eight high-frequency indicators tracked by it improving, five holding steady, and only one deteriorating in January. The Bloomberg estimates say the solid start to the new quarter in January is based on “nascent gains” in the September-December 2020 quarter. Economists in a Bloomberg survey project a 0.5% growth figure for the third quarter. Services and manufacturing activity, passenger vehicle sales, exports, and even demand for loans picked up in January, indicating gains which were already visible from the previous month.
That the consensus is on a positive figure is evident from other estimates as well. Barclays, for example, pegs the Q3FY21 GDP figure at 0.8%, taking into account the high-frequency data. By most accounts, while the key indicators are either close to, or above their pre-Covid levels, the countercyclical fiscal stance adopted by the government seems to have added to the hopes of a smart recovery in FY22. Acuite Ratings, in their estimates, support the Economic Survey estimate of an 11% GDP growth rate for FY22. “Various agencies, domestic and global, have amply quantified the FY22 growth rebound - a near certain double-digit expansion,” the ratings firm said. “Growth prospects remain positive amidst gradual easing of lockdown restrictions, supportive fiscal and monetary policy environment, global recovery, and pent-up demand.”
The ratings firm believes that further traction in the roll-out of the Covid vaccine will boost sentiment. “[The] pace of commodity price increase, however needs to be watched,” it added.
Let us consider where the optimism stems from. The Index of Industrial Production (IIP) ended calendar year 2020 on a positive note, recording a modest 1% expansion on an annualised basis in December. This is compared to a 2.1% contraction in November, Acuite Ratings has pointed out. Both the manufacturing PMI and services PMI registered increases in January, raising hopes further that the base was built in the December quarter. Labour markets have also shown a recovery in the beginning of calendar 2021, with unemployment rates falling and a rise in employment figures.
The easing of lockdown restrictions and the increase in mobility, the gradual rise in the number of inoculations of the Covid-19 vaccine (which, in turn, is expected to increase business and consumer confidence), and the expected increase in urban demand and demand for contact-intensive services with the growing number of vaccinations are all adding up to expectations of the recovery momentum continuing smartly in FY22. Besides, while the Budget 2021 unleashed a major countercyclical fiscal push, the Reserve Bank of India (RBI) has also indicated it is standing steadfastly behind the government’s efforts to get the growth momentum back.
However, despite the general bullishness, there are some concerns. With a few states, particularly Maharashtra and Kerala, showing increases in Covid-19 infections once again, all eyes will be firmly tracking the infection figures to check for a possible second wave. Besides, as Barclays points out, the government’s vaccination programme has started slowly. There is expectation that the roll-out will gather steam in the second phase. The government, too, will be closely monitoring the rise in infections.
Meanwhile, just a day before the third quarter GDP figures are to be announced, global ratings agency Moody’s and its Indian affiliate ICRA put out their own views on the economy and the road ahead.
Moody’s said India’s “weak fiscal position” will remain a key credit challenge in 2021. ICRA said it expects a considerable rebound in India’s economic growth in FY22 on the back of higher central government spending, and “a pickup, albeit uneven, in consumption.”
Overall, ICRA projects that real and nominal GDP will rise 10.5% and 14.5%, respectively, for FY22 as the pandemic recedes. Moody’s says the central government’s fiscal deficit for FY21 and FY22 should be lower than projected, supported by stronger revenue generation in the fourth quarter of FY21 and higher nominal GDP growth in FY22. Finance minister Nirmala Sitharaman had announced in Budget 2021 that the fiscal deficit for FY21 will stand at 9.5%, while that for FY22 has been pegged at 6.8%.
For now, though, all eyes will be on the third quarter GDP growth figure and what it signals for the next fiscal.