First quarter GDP numbers, as released by the government, are quite encouraging and potentially set up a strong platform for growth to rise beyond pre-pandemic levels by FY23.
The recovery in the Indian economy continues well with real GDP growing at 20.1% y-o-y in the first quarter despite the pandemic-related restrictions. This high growth rate was, no doubt, due to low base in the year ago quarter, when the economy shrunk by more than 24% due to stringent closures in the year ago quarter. To provide further perspective, the real GDP number stands at Rs 32.4 trillion compared to Rs 35.6 trillion during the pre-covid times in Q1FY20.
GDP growth numbers in the first quarter is complimented by the robust pickup seen in the recently released industrial production numbers, highlighting a solid growth of 11.5% in July 21. Thanks to the gradual reopening of the economy, the IIP growth now is just 0.3% lower than pre-covid levels seen in July 19.
Demand signs are evident
Indeed, both the macro-economic and high-frequency data point towards steady growth in the coming quarters. While the base effect will wane over the coming months, the continued easing of restrictions and the faster pace of vaccinations, averaging at about 7 million doses per day, will see the recovery persist as demand and investment activity gathers pace.
As a result, the broader consensus among economists is that the economy should be able to scale the 10% growth mark this year, thanks to the lower covid-19 cases coupled with the response of the government and the private sector.
A deep dive into the GDP numbers suggests that the demand side is picking up strongly. Except for a blip in government consumption, all other demand-side components such as exports and private consumption have recorded strong growth in Q1. While growth in exports has been truly exceptional.
Moreover, with the coming festival season, consumption growth is likely to grow substantially as we witness a pickup in some of the high frequency indicators. Hence, private consumption could be better than the 19% growth seen in Q1.
The manufacturing and construction side shows a good recovery too. Manufacturing grew at 50%, while construction grew 68% in Q1. The trade sector also showed strong growth of 34% in Q1.
Agriculture remains the backbone
One of the highlights of the current GDP numbers is the resilience of agrarian economy with agricultural activity recording high growth, despite the severe impact of the second wave to the rural economy. However, with relatively low levels of lockdown and restrictions, the agricultural sector has been witnessing growth at ~ 8% higher than its pre-covid level.
Of course, it will be a while before the whole economy reaches its earlier highs with one of the key risks being an escalation in the third wave of covid-19. If there is no third-wave or its effects are limited, then the third and fourth quarter growth will indeed be much better than anticipated.
Strong platform for FY23
One thing that was striking was the ability of the economy and the corporate sector to weather the fierce second wave. The Q1 sales and profit numbers were sharply higher for the formal sector in Q1. The private sector has taken several cues from the first wave having implemented cash-conservation methods. This has enabled them to stay much ahead during the second wave. These measures will also play a safeguarding role if a third wave strikes, further highlighting the preparedness of the corporate sector.
Besides, the government is likely to step up capital expenditures in the coming quarters, post the monsoons. This should also see a revival in investment activity going forward. So even while GDP may not reach the pre-pandemic levels, it provides a much stronger platform entering FY23.