Q3FY21 GDP: Momentum needs to be sustained

The GDP growth number for the last quarter, Q3FY21, at 0.40% corresponds to more or less what most of the market participants and analysts had expected. The GDP has reported positive growth after two consecutive quarters of contraction (-24.4% for Q1FY21 and -7.3% for Q2FY21). That should bring in some amount of relief. The reason for this is two-fold. First, economic growth is in the positive territory, that the economy is growing, though at a borderline rate. Two, that the days of negative growth, an economy hammered down by the pandemic, is more or less behind us. The movement in the components of the GDP number also tells us some of the areas which are lagging and where needs to be better concentration of efforts so that we realise much higher growth in the coming quarters.

The economic rebound is the result of continuing improvements in agriculture and industry, which have recorded growth of 3.90% and 2.70% respectively. While mining witnessed a decline of -5.90% there was uptick in construction to the tune of 6.20%. Manufacturing too is in the positive territory at 1.60%. The improvements in manufacturing and industry are already quite visible in the corporate performance reported in the last two sets of quarterly earnings results. While Q2 performance was mainly due to enhanced operational efficiencies, Q3 scaffolded it further with gains in the bottom line

The very important consumption demand, which is measured by Private Consumption Expenditure, continues its contraction, with a decline of -2.40% in Q3. The consolation is that the rate of contraction has slowed down from 11.30% in Q2. The investment demand or the Gross Fixed Capital Formation reflects a capital formation which is turning positive after a declining spell of over one year with a 2.60% growth. This is a crucial indicator of investment demand, and what is important is sustaining this momentum. The section under the head, public administration, and other services, which stands for government spending, shows a decline of -1.50%, mainly reckoned as due to the weak growth in other services.

It is interesting to look at the latest Core Sector numbers, which showed a growth of 0.10% in the eight infrastructure sectors, which actually slowed from 0.2% in December20. The core sector represents 40% of the IIP, and it is quite a weak number when read along with the GDP numbers, as futuristic indicators of economic activity. Contraction was seen in crude oil, natural gas, refinery products and cement in Jan 20, coal output too fell into the degrowth territory, while steel and electricity output expanded.

The generally encouraging picture may be rendered dull by some factors which are relevant at this juncture, which we need to be cautious about. The second wave of the pandemic is still to establish its foot, but the number of cases is gradually rising. The first wave was effectively dealt with. Therefore, the efficacy with which the second wave is contained is equally important. There have been many localised shutdowns in some cities and states, and this may have an impact on the level of overall economic activity in the coming days. Certain activities have been partially or completely closed down like educational institutions, hotels and restaurants, cinema halls etc. We need them back before long because these are some of the productive activities which employ a large number of people. The saving grace is that we already have appropriate fiscal and monetary polices, which have helped the economy sail through one of the most tempestuous times. The complete opening up of trade and transport, hospitality services, further impetus to consumption and investment, are required to sustain the growth momentum. For real growth, it is not enough that we recover somehow to feeble single digit levels, we need much more than that to say that we are really growing.


Leave a Reply