GDP numbers: Positive surprise for third quarter but negative for FY21?

The CSO keeps the suspense alive on growth forecasts by coming with a second advance estimate in February after the first was released in January. The January forecast is based on extrapolations of data known till November or December for most variables while the second estimate is based on more of the realized data. Given that corporate performance has been good for the third quarter and that these numbers enter the calculations for several sectors, these estimates capture the picture in a better manner. Simultaneously there are the Q3 numbers which are provided which are more significant this time as several indicators showed that the economy had turned the corner.

The picture emerging is definitely satisfactory as growth for the year or rather degrowth is better than what was projected at -7.2% with value added now to degrow by 6.5%. The problem has been on the tax collection front as well as higher subsidies which has now caused GDP growth to fall by 8% as against -7.5% projected earlier. This is a result of taxes falling and subsidies increasing (with a new recognition of FCI loans). The improvement in growth rates or rather degrowth rates has been across most sectors relative to the earlier estimate.

The Q3 growth numbers have contributed to this improvement in numbers as GDP has improved to 0.4% for GDP and 1% for GVA. This is a big positive as negative growth was expected this quarter. The number is also significant as it shows that we are now out of the technical recession which is defined as two successive quarters of negative growth. Also, as most sectors have started moving back to a normal growth path in Q4 there will be some acceleration here for sure. Manufacturing, construction and finance groups registered positive growth besides agriculture and electricity.

Two areas of concern have been consumption and investment and here the Q3 growth numbers are more pertinent. Consumption and investment growth have been marginally higher. Therefore the spending witnessed in the festival season does find its reflection here. However, given that private investment is down the improvement in the gross fixed capital formation rate from 27.5% to 27.7% may be attributed to government capex. For the year however, it continues to be moving downwards from 28.8% to 26.7%. Quite clearly this has to be the focus area next year.

The GDP forecasts do indicate that we are on the right path and in the absence of any serious localized lockdowns can be expected to accelerate with time. Q4 growth would be steadier for sure and there will be an upside to the 1% growth in GVA witnessed in Q3. A lot will depend again on corporate performance in this quarter as these numbers enter the computation for sectors such as manufacturing, trade, transport, communication, hotels, etc. An interesting point here is that while manufacturing sector in terms of GVA would be moving in the positive direction, the same for the physical production as depicted by the IIP would be trailing.

But this does set the tone for higher growth numbers in FY22 which will be coming on a negative base and a double-digit growth rate is what can be expected.

The author is chief economist at CARE Ratings and author of: Hits & Misses: The Indian Banking story. Views are personal.

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