Beyond illusion of base effect, Q1 GDP shows pain but also hope

On a year-on-year basis, real GDP growth was a stellar 20.1% for Q1FY22, a number unseen before. The data showed that private consumption expenditure and investment powered this growth, expanding 19.34% and 56.6% respectively. The government took a backseat with public spending shrinking 4.78%. Among sectors, mining and quarrying, manufacturing and construction contributed to gross value added (GVA) growth. But all we have to take note is that in the June quarter last year, the economy had shrank massively, as a nationwide lockdown brought activity to a grinding halt for two months. Ergo, the year-on-year comparison is a mere optical illusion. To be sure, the pace of recovery from the Covid-19 pandemic’s blow has increased. The economy clawed back some of the lost value during Q3FY21 and Q4FY21. While the second wave has derailed the pace of revival, India’s GDP is now 10% lower than its comparable pre-pandemic level. Recall that the economy had contracted by 7.25% during FY21.    

Of course, the second wave has bruised the economy and a sequential fall in both nominal and real GDP reflects this hit. Real GDP growth shrank 16.9% from the previous quarter. As expected, the brunt of the second wave’s impact was visible on all sectors. Gross value added (GVA) of agriculture fell 10.69% sequentially while that of industry dropped 17.08%. Services, interestingly, showed a milder contraction of 11.82%, propped up by financial services. On the expenditure side, private final consumption expenditure contracted by 17.44% while government spending was also down by 7.57%. The upshot is that the second wave was more virulent than the first and upset the economic revival in a big way.

To be sure, the second wave didn’t bruise the economy like the first one did because restrictions were mild. To that extent, the growth metrics do have a silver lining. Analysts believe that as restrictions have begun to ease, the economy will hit its old stride in recovery. In fact, some such as Rahul Bajoria, chief economist at Barclays Securities (India) Pvt Ltd that the first quarter metrics warrant an upward revision in GDP growth expectations. “For the full year FY21-22, we revise up our GDP forecast, and now expect the economy to grow by 10.2% in FY21-22, modestly higher than the RBI’s 9.5% projection and our previous forecast of 9.2%,” he wrote in a note. There are reasons for optimism. High frequency data in July and August suggest that the pace of recovery is picking up. From electricity consumption to mobility, most metrics have shown a pick-up. Another source of comfort from the first quarter GDP data itself is the fact that power consumption is now above pre-pandemic level.

How would policymakers view this data? For the Reserve Bank of India (RBI), the focus so far has been growth. The central bank not only wants the economy back to its pre-pandemic level but also on a sustained growth path. Also, the first quarter print is marginally lower than what the RBI has forecast. Therefore, it may not trigger a change in the central bank’s approach. Unlike the dress puzzle of 2015, the illusion of high GDP growth is easy to dismiss and policymakers would focus on the persisting pain points.