GDP Update – Q2FY22

The GDP growth number for Q2FY22 was reported at 8.4% as compared to a contraction of 7.4% in the first quarter of FY21. The GVA number for Q2FY22 came in at 8.5% as compared to -7.3% during the year ago comparable period. The GDP and GVA growth rates for the preceding quarter was 20.1% and 18.8% respectively. As the benefits of base effect have waned the economic growth too has normal- ised. The gradual relaxation of lockdown related restrictions and the healthy pace of vaccinations have supported the economic growth.

The effect of localised lockdowns in the preceding quarter, that led to a loss of momentum in economic recovery, has largely eased in the current quarter under purview. The economic growth for the previous quarter was reeling under the pressure of the second wave. As the year-on-year growth does not reflect the entire picture of the health of the economy, the sequential numbers and compar- ison with pre-pandemic period need to be considered. While the sequential growth in Q1FY22 indi- cated loss of momentum, the Q2FY22 numbers report an economic recovery is underway. The strength of the growth in Q2FY22 is also visible from the fact that the GVA numbers have crossed the pre-pandemic levels. The GVA at Basic Price was reported at Rs. 32,71,453 crs in Q2FY20, and the number for Q2FY22 came in at Rs. 32,88,736 crs.

The growth recovery was a broad based one in the current quarter, both on a sequential as well as year-on-year basis with a few of the components even managing to breach the pre-pandemic levels. The growth for agriculture and allied activities was reported at 4.5% for Q2FY22. The industrial activity growth rate was reported at 6.9% in the latest quarter as compared to 46.1% in the preceding one. Within industry, the growth for mining (15.4%) maintained steady growth after an extended period in the contractionary zone. The other components of industry viz, manufacturing (5.5%), electricity (8.9%) and construction (7.5%) reported healthy growth rates. With the improvement in vaccination numbers the growth for contact driven service sector too improved for Q2FY22. The services sector reported a growth of 10.2% as compared to 11.4% in the preceding quarter. The sub-components within the services sector which reported a mixed trend in the preceding quarter, witnessed a more robust growth in the current quarter. The trade, hotel and transportation (8.2%) reported healthy growth, the finance and real estate services (7.8%) too saw improvement in activity. Public adminis- tration, defence and other services, partly representative of government expenditure too improved and grew at 17.4%, indicative of a higher government expenditure.

On the expenditure front, private consumption expenditure’s share of the GDP saw some readjust- ment on the lower side at around 54.5%, but with a higher sequential growth. On a year-on-year com- parison, the private consumption expenditure reported a growth of 8.6%; whereas when compared with Q2FY20 (pre-pandemic level) the numbers are still lower by 3.5%. Even as the private consump- tion is lower than the pre-pandemic levels, the momentum has again picked-up. The government consumption expenditure, had contracted by 4.8% in Q1FY22, recovered and the growth rate for Q2FY22 was reported at 8.7%. The government expenditure is expected to remain robust for the remainder of the FY22. The gross fixed capital formation reported a growth of 11% for Q2FY22 and the absolute numbers too breached the pre-pandemic levels.
Notwithstanding the fact that the headline numbers are muddled by the base effect, the growth trajectory has improved and seems to be on much firmer ground now as compared to the preceding quarter. Having said that, the economy would continue to require nurturing of the nascent recovery through a supportive fiscal and monetary policy.
The key risks to the growth trajectory at the current juncture are the new variant of the corona virus and the inflationary pressures. The strength of contagion and the severity of the symptoms coupled with the mortality rate would dictate the future course of action by the governments. A few of the countries have again imposed lockdowns in the wake of increasing number of patients and if the vaccines are not effective against the new variant, there may be another round of lockdowns world over. The other key risk is of inflation. The price rise has already impacted the corporate earnings, as was seen in the reported EBITDA margins in the latest earning season. If the input cost pressure does not ease, the price pressures may eventually get passed onto the consumers. The consumer inflation will not only impact the purchasing power but also limit the ability of the central bank to stay accom- modative.



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