With second wave tapering, a rapid recovery seems underway

The Gross Domestic Product (GDP) for the first quarter (April-June) of the current financial year is seen growing between 18% and 22% - a period characterised by local lockdowns imposed by state governments to curb the spread of the second wave of the Covid-19 pandemic. The economic impact of these localised lockdowns was much far less when compared to the nationwide lockdown of last year.

The first-quarter growth numbers will be released on August 31.

The number looks high because of the low base of the same period of the previous financial year when GDP growth contracted 24.4% as economic activity came to a grinding halt due to a nationwide lockdown imposed in the last week of March 2020.

“We forecast India’s economy expanded 21.2% year-on-year in April-June as a low base and a much smaller loss of activity due to the second Covid wave push growth to an all-time high for a single quarter,” said Rahul Bajoria, chief economist, Barclays.

“The second Covid-19 wave acted as a stumbling block to the robust recovery that was underway. Still, the economic damage appears to be less than previously expected. With the second outbreak brought under control, a rapid recovery appears underway,” he said.

Read | India's GDP growth likely touched a record in April-June

The Reserve Bank of India, which projected Q1 GDP growth at 26.2% in April, revised the projection down to 18.5% in June and then again revised upward to 21.4% in the August review of the monetary policy indicating the lesser impact of the second wave.

Corporate performance

Soumya Kanti Ghosh, group chief economic advisor of State Bank of India, however, made a conservative estimate of 18.5% for the April-June period, ‘with upward bias’.

“The corporate results announced so far indicate that there is a substantial recovery in corporate GVA (EBIDTA + Employee cost) in Q1 FY22. The corporate GVA of 4,069 companies registered a growth of 28.4% in Q1 FY22. However, this is lower than growth in Q4FY22, thereby corroborating the lower GDP estimate than what was thought earlier,” Ghosh said in a report.

The Barclays report expects the year-on-year growth in the rural sector to have slowed down as the second wave spread deep into the rural countryside.

“As such, rural consumption showed clear signs of slowing during the quarter, with weaker sales of fertiliser and two-wheelers, and an increase in the rural unemployment rate during the quarter. On the other hand, we expect output in the mining sector to improve modestly,” the report said.

Manufacturing and construction sectors are likely to lead the recovery, as consumption of steel and cement remained robust, driven by both higher government spending and export demand. The easing of curbs on movement, especially for businesses, has boosted exports to record highs, while weak domestic demand has stunted imports.

“Q1 FY22 enjoys strong support from a favourable base from last year’s near-complete nationwide lockdown which had led to a massive contraction in Q1FY21 GDP,” said Suman Chowdhury, Chief Analytical Officer, Acuité ratings. The rating agency projects GDP growth for the first quarter between 22% and 23%.

“While the intensity of the second wave of Covid and the subsequent lockdowns across almost all states have disrupted the contact intensive services again in Q1, the growth print is likely to be supported by the relative resilience of the industrial sector in this phase of the pandemic, steady uptick in exports and improved government capital expenditure levels apart from the base factor,” Chowdhury said.

Growth estimates for the full financial year made by several agencies following the second wave were moderated. The International Monetary Fund, for example, in its July 2021 update of the World Economic Outlook, has brought down India’s FY22 GDP growth forecast to 9.5% from its earlier projection of 12.5% in April 2021. Similarly, the RBI also lowered its growth projection from 10.5% to 9.5% following the second wave. The mood has changed since then. Looking at some of the indicators in July and August, experts suggest economic activity is gaining momentum. One indication is the manufacturing PMI (seasonally adjusted) which increased from an eleven-month low of 48.1 in June 2021 to 55.3 in July 2021 as Covid-19 restrictions were eased.

IDFC First Bank’s business continuity index, which covers daily activity indicators for industry and services, is now back to levels last seen in March 2021 – just before the second wave. “The improvement is led by a rise in individual mobility, electricity generation and freight traffic. Looking ahead, recovery is likely to get support from government Capex and strong export growth,” the report from the bank said.

The Nomura India Business Resumption Index (NIBRI) stayed above its pre-pandemic level for a second week, rising to 100.8 for the week ending August 22 vs 100.1 previously. “We estimate April-June GDP growth contracted sequentially, but rose 29.4% y-o-y, above consensus. The continued recovery in the NIBRI in Q3 [Jul-Sep], and the upcoming festive season in Q4 [Oct-Dec], the payment of dearness allowance arrears for public sector employees, ongoing vaccinations, easy financial conditions, and fiscal activism – all support our above-consensus GDP growth forecast of 10.4% y-o-y in FY22 (year ending March)” Nomura said.

(The writer is a Mumbai-based journalist)