India’s gross domestic product grew at 8.4% in the quarter ended September, according to data released by the National Statistical Office on November 30. The latest growth figures are higher than the 7.9% and 8.1% projections made by the monetary policy committee of Reserve Bank of India and a Bloomberg forecast of economists. What does this entail for the economy?
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While the December quarter GDP numbers will only be released in February 2022, reading some high frequency numbers along with the latest GDP data can help us answer this question. Here are four charts that can provide a macroeconomic snapshot of the Indian economy.
The sequential recovery seems to be gaining further momentum
Two highlights of the latest GDP numbers are the September GDP number exceeding the pre-pandemic (September 2019) value and an impressive sequential recovery – GDP growth in quarter-on-quarter terms was 10.4% in September 2021 – from the disruption caused by the second wave of Covid-19. The latter, when seen with the encouraging trend in high frequency numbers such as Purchasing Managers’ Index (PMI) and the Nomura India Business Resumption Index (NIBRI), suggests that the economy continues to be on a growth trajectory. While the PMI numbers for November will be released over the next few days, NIBRI has been reaching new highs every week.
See Chart 1: GDP sequential growth and NIBRI (quarterly averages)
But revival of consumer sentiment will hold the key to a broad-based recovery
The biggest cause of alarm in the latest GDP numbers is the fact that Private Final Consumption Expenditure (PFCE), which has a share of more than 50% in overall GDP, is still below pre-pandemic levels. This buttresses the point about the current economic recovery being unequal in nature, where workers and smaller firms, especially in the informal sector, have been struggling to ride the growth curve.
Most high frequency indicators such as PMI and NIBRI capture formal sector activity. This increases the risk of an optimism bias in accessing the prospects of the macroeconomy at large. However, RBI’s Consumer Confidence Survey (CCS) has been pointing towards a weakness in consumer sentiment until the September quarter. The lag in PFCE revival in the September quarter supports what sobering data from the RBI’s CCS has been telling us. The next round of the CCS – it will be released when the MPC meeting gets over on December 8 – will offer crucial insights on whether one can expect mass demand and, therefore, PFCE’s revival in the December quarter.
See Chart 2: RBI CCS current perception index
Fiscal policy support will be indispensable for growth
If there is one lesson in the economic recovery in the first half of 2021-22, it is the importance of fiscal support in economic recovery. Gross Fixed Capital Formation (GFCF), which measures the investment component of GDP, has shown an increase despite no recovery in PFCE. It means that capital spending by the government – with consumer demand lagging, private companies have no incentive to invest – must have played an important role in pushing up overall capital spending.
In nominal terms, the central government’s capital spending between April and October stood at ₹2.53 trillion, which is higher than the 2020-21 ( ₹1.97 trillion) and 2019-20 ( ₹2.01 trillion) values for the same period. To be sure, some of this rise will be due to inflation. Even in the service sector category, the only sub-category that has surpassed pre-pandemic levels is public administration, defence and other services, even as output of employment-intensive, non-farm sectors such as construction and trade, hotels, transport, communication and broadcasting services continues to lag below pre-pandemic levels.
See Chart 3: Sector-wise GVA growth
Worsening terms of trade could generate headwinds for rural demand
Agriculture has been an important cushion in softening the pandemic’s blow to the Indian economy. It was the only sector that escaped contraction in 2020-21. Growth rate in agriculture and allied activities has continued to impress in 2021-22 as well, with both June and September quarters’ year-on-year growth numbers coming at 4.5%. Its contribution to rural demand, however, might be losing momentum because of worsening of terms of trade, or the ratio of agricultural and non-agricultural prices. This can be seen from the fact that nominal growth in agriculture and allied activities came down from 11.1% in the June quarter to 7.9% in the September quarter for the same real growth rate. Because food inflation has been lagging non-food inflation, purchasing power of agricultural incomes is likely to suffer. This, when read with reports of acute fertilizer shortages in various parts of the country, which will have the twin effects of rise in cost of cultivation and drop in yields, does not bode well for rural demand.
See Chart 4: food and non-food inflation
