India’s GDP grew after two straight quarters of contraction. But the Q3 data threw up a few surprises. Government expenditure continued to contract in the October to December quarter, with efforts to prop up the economy pushing up capex instead. Economic recovery continues to remain well entrenched, belying the official estimates of an implied contraction in the January-March 2021 quarter.
Here’s what economists have to say about the GDP growth data:
Private Sector Activity Recovery
Nominal core GVA—headline GVA excluding agriculture and public administration, a closer proxy of private sector activity—grew 3.5% annually after a contraction of 7.6% in the second quarter, said Sreejith Balasubramanian, economist at IDFC Asset Management Co. This, along with the ongoing pick-up in high-frequency indicators and listed corporates’ revenues, implies India could well be on track for a cyclical recovery driven by fiscal spending, global manufacturing rebound, and a potential real estate sector revival, he said. But the true hit to the labour market and the informal sector is less clear, he said.
Lower GDP, Higher GVA: Data Distortions To Blame?
While GDP grew by 0.4%, Gross Value Added grew by 1% in Q3FY21. Payment of past year food and fertilizer dues may be distorting GDP estimates, said Pranjul Bhandari, chief India economist at HSBC. We know that GDP = GVA + indirect taxes – subsidies. We also know that indirect taxes grew sharply in the December quarter- GST grew by 8% annually and central government indirect taxes grew 33% annually, Bhandari explained. So, for GDP to grow at a much slower pace than GVA, subsidies would have had to grow rather strongly, she added.
This may have been the case because of repayment of some of the past accumulated dues to intermediaries for food and fertilizer subsidies, thereby depressing the December quarter GDP growth and impacting estimates for the full year, according to Bhandari.
“With GDP getting impacted by payment of previous-year subsidy dues, we think GVA will better reflect economic growth, not just in FY21 but also in FY22, when some more of the past year dues are scheduled to be paid off,” Bhandari said.
Perplexing Public Expenditure
On supply side, the noteworthy feature is the return of the industry GVA growth, according to a research note by economists at QuantEco Research. At a granular level, manufacturing recovery in Q3 was driven by pharma, chemicals, food, basic metals, electrical equipment and rubber and plastics, the note said.
The pick-up in economic recovery continues to progress well into the fourth quarter, as validated by high-frequency indicators such as GST collections, automobile and tractor sales, toll collections, PMI, among others, said Yuvika Singhal and Vivek Kumar, economists at QuantEco research.
On the other hand, contraction in public administration and defence spending is a bit perplexing, despite revenue expenditure excluding interest payments of the centre expanding 23% on an annual basis in Q3FY21 compared to a contraction of 14% in the previous quarter. “We believe that a substantial contraction in states expenditure can possibly explain this gap,” they said.
Despite growth returning in the third quarter, the second advance estimate expects FY21 GDP to contract 8% as compared to first advance estimate of a decline of 7.7%. This indicates that despite GDP returning to the positive territory in Q3FY21, the recovery is likely to be slower than anticipated earlier, said Sunil Kumar Sinha, principal economist at India Ratings. On a quarterly basis, the changes in the estimates for the previous quarters of the financial year suggest that the compression was sharper than earlier estimates and recovery is also sharper than earlier estimated.
While the economy is expected to continue to grow in Q4FY21, imputed growth for Q4FY21, as per official estimates, comes out to be negative 1.1%. As such, the quarterly estimates published for the ongoing year so far and the imputed growth for Q4 gives confusing signals, Sinha said.