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01 Mar 2021



  • India’s economy finally exited the recession after two quarters, to clock a growth of +0.4% in Q3FY21 versus a contraction of 7.3% in Q2.
  • Despite being a rear-view vision of the economy, Q3 GDP data validates the recovery underway aided by the gradual ‘unlocking’ of the economy and India managing to keep the rise in COVID cases on a tight leash.
  • FY21 growth now pegged to be marginally weaker at -8.0% accompanied by a shallower contraction of 6.5% in GVA. This wider wedge between GDP and GVA can be explained by weak Net Indirect Taxes i.e., a combination of low tax growth and higher on-budget food subsidies.
  • Investment growth positive in Q3 is highly encouraging
  • A strong unexpected upswing in construction and finance, real estate and professional services underscores the unevenness in pace of recovery at a sub-sector level
  • Continue to expect FY22 GDP to show a record expansion of 11.0%. Rise in global commodity prices and domestic COVID infections on watch as possible downside risks.

India’s economy finally exited the recession after two quarters, to clock a growth of +0.4% in Q3FY21 versus a contraction of 7.3% in Q2. Despite being a rear-view vision of the economy, Q3 GDP data validates the recovery underway aided by the gradual opening of the economy and with India having managed to keep the rise in COVID cases on a tight leash so far despite the threat of the virus mutants.

The second advance estimate now pegs FY21 growth to be marginally weaker, at -8.0% (vs. -7.7% earlier) accompanied by a shallower contraction of 6.5% in GVA (vs. -7.0% earlier). The wider wedge between GDP and GVA is owing to the weakness in Net Indirect Taxes (NIT, i.e., Indirect taxes – subsidies) which are expected to record a higher contraction of 23% (vs. 13% earlier), amidst low tax collections but more importantly higher on-budget food subsidies.

Expenditure side: Investments on a strong turf

  • In strong support to headline GDP, investment growth turned positive after a hiatus of three quarters to expand by +2.5% in Q3 FY21, possibly led by the spike in central government capital expenditure. Early signs of this were visible in high frequency data such as Capital Goods within IIP clocking the fastest sequential pick up in Q3 among all sub-sectors and imports of capital goods at par with pre-COVD levels as of Jan-21.
  • Private consumption growth continued to contract in Q3 FY21 for the third consecutive quarter by 2.4%. However, the pace of decline moderated significantly from a double-digit degrowth of 11.3% in Q2. A combination of pent up and festive demand recovery was visible in Q3 across a gamut of lead indicators such as sales of passenger vehicles, tractor and FMCG. This is also reinforced in consumer sentiment, which as per RBI survey, has continued to improve on a FYTD basis for both current and future assessments. In similar vein, Government consumption too contracted, albeit by a mild 1.1% compared to 24.0% in Q2.
  • Change in stocks, i.e., level of inventory in the economy, continued to recover in Q3 for the second consecutive quarter after a massive contraction of 32.5% in Q1 post the outbreak of the pandemic.
  • Net exports, continued to remain a drag on growth, albeit to a smaller extent compared to H1FY21.

Sectoral: Industry led recovery

  • Expectedly, growth in Agriculture sector remained healthy at 3.9%, reflecting the robust Kharif output and favourable prospects for Rabi with sowing at a record high.
  • Industry GVA clocked a positive growth of 2.7%, having been in contraction over the past 5 quarters. The recovery was led, as preempted by IIP data by manufacturing and electricity sub-sectors, in addition to the surprise support from construction. Growth in the latter saw a sharp swing from -7.6% in Q2 to +6.2% in Q3.
  • Services GVA remained in contraction for the third consecutive quarter, still afflicted by the pandemic and its disproportionately higher impact on high contact sectors of hotels, tourism, civil aviation etc. Among other services, growth was exceptionally robust in Financial, Real Estate and Professional Services, which while underscoring the unevenness in the speed of recovery at the sub-sectoral level, is also encouraging as it echoes the normalization of economic activity and labour mobility.
  • Defying expectations of a strong buildup (basis monthly CGA data), public spending contracted by 1.5% in Q3. While it is difficult to ascribe an exact cause to it, but possibly a sharp contraction in states’ expenditure more than offset the center’s spending spree in the quarter.

Looking ahead, we continue to expect the GDP growth to expand by 11.0% in FY22. While this anticipated growth would be front loaded as H1 FY22 would benefit from a significantly favorable base effect, but recovery will find support in -

  • Continued tapering of lockdown restrictions allowing mobility indicators which are now just 6% below pre-COVID levels
  • The policy environment characterized by a countercyclical fiscal outturn reinforced in the Union Budget FY22 amidst an accommodative monetary and liquidity backdrop that RBI remains committed to
  • Sustained progress on rollout of vaccine in India, with 0.7% of the population getting inoculated so far, will be a boost to consumer and business confidence both as it makes steady progress. Urban demand and demand for contact-intensive services including hospitality, leisure and entertainment are expected to see a fillip as vaccine administration picks up.
  • A synchronous V-shaped global recovery

On the downside, rise in input costs amidst hardening global commodity prices along with the recent rise in COVID infections remain a risk to business sentiment and pace of recovery.

Table 1: India’s GVA YoY%: Sectoral break-up

Chart 1: Wedge between GDP and GVA owing to statistical anomaly