Q1FY21 GDP: Robust Recovery Now Needs Further Stimulus
One comforting aspect of the 23.9% year-on-year GDP contraction print for Q1FY21 is that it was quite close to our forecast of 24.2%, against the analysts’ median of 18%. Given that even our internal forecasts for the segments of agriculture, industry, and services and sub-segments thereof were relatively close to the official print, this is doubly encouraging. Processes that are understood, and therefore predictable, are good from a policy response perspective, indicating that the dynamics of the slowdown are therefore known to policymakers, an invaluable aid to designing an appropriate stimulus-response. If we had more or less got it, the policy authorities, with their vastly superior access to data and underlying dynamics, certainly would.
Yes, the 24% contraction is “unprecedented” – a term we have now got used to when describing this pandemic-led crisis. But this is understandably the outcome of a combination of extremely contractionary policy responses. Contractionary? Despite the massive monetary and fiscal stimulus measures? Yes. First and foremost, this is a public health crisis. The policy response with the virtual shutdown in April that was much more severe than a lockdown, more severe than probably any other large economy. That and the varying lockdowns in the months thereafter have far overwhelmed the other stimulus measures. The output contraction is a reflection of the primacy of “lives over livelihood”.
The broad tapestry of the slowdown was widely obvious and anticipated; whether the growth contraction would be 5% or 30% was the unknown detail. The services segment would ostensibly bear the brunt even post the unlock and graded re-opening process. However, the industry sector contraction at 34% was significantly more severe than the negative 23% for services. The reason is that two sub-segments of the services sector – financial services and public administration – were supposed to be counterweights (the result of monetary and fiscal policy measures, respectively), and to an extent have printed as expected.
There are a few surprises. The agriculture sector growth at 3.4% was lower than anticipated, given both the Rabi season food output and the magnitude of funds and other support systems that the central government is known to have transferred via MGNREGA, direct transfers to bank accounts, and other subventions. In addition, measures to encourage and facilitate ancillary agricultural activities – animal husbandry, fisheries, etc – might have been expected to have further boosted this segment’s growth.
The other segment is the one labelled ‘Public Administration, Defence and Other Services’. At minus 10%, this was the largest deviation from our expected positive print.
This leads to the other side of the GDP estimation – demand.
Supporting the view on government spends as a counter-balance to the demand drop, government consumption was the sole positive growth segment, at 16%. But this is still a relatively small share of GDP (12% in FY20 in nominal terms) compared to private consumption (60%) and investment (30%). These segments contracted by 27% and 47%, respectively, indicating the extent of demand destruction. Inventory buildups are a part of capex (operating capital, albeit a small part relative to fixed capital build-up), and the drawdown was significant, at minus 21%.
While attention remains fixed on the real GDP growth, of greater material consequence is the contraction in nominal GDP, an even sharper drop from 7.5% in Q4FY20 to minus 23% in Q1FY21.
Nominal GDP shrank from Rs 49 lakh crore in Q1FY20 to Rs 38 lakh crore the last quarter, a drop of Rs 11 lakh crore.
This loss was pretty evenly distributed between private consumption and investment.
The immediate impact is the constraint this imposes on a robust direct fiscal response, which is corroborated by the fiscal numbers also released on Monday. Tax and non-tax central revenues had more or less halved during April-July FY21, versus the previous year. The ongoing discussions on payment of GST compensation cess is another manifestation of the impact of the nominal incomes.
So what are the implications on recovery and policy going forward? Q2FY21 growth will be much improved, although still probably negative, in lower single digits.
The set of leading indicators—some actually ‘nowcasters’—which we track suggests that the sharp recovery in May and June had lost momentum in July and early signals in August do not indicate a renewed recovery.
The Covid-19 infection rates have continued to surge and have diffused into semi-urban and rural geographies.
Monetary and fiscal policy will now have to be more aggressive at the crease. RBI’s determined, innovative, and expanding pushback has done much to contain and gradually reverse the shock but the fight now forth will need to have a larger fiscal component.
Saugata Bhattacharya is Executive Vice President - Business and Economic Research, at Axis Bank. Views are personal. Abhaysingh Chavan contributed to the article.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.