India’s Q4 growth data posted a positive surprise, with both GVA and GDP faring better than market consensus and versus NSO’s advance estimates released in Feb-21. GVA grew by 3.7% on an annualized basis to mark the fastest pace in FY21, with GDP expansion somewhat lower at 1.6%. As such, for the fiscal year as a whole, GVA and GDP contraction stood at -6.2% and -7.3% respectively, fairly close to our forecasts.

The growth uptick in the last quarter of FY21 reflects the impact of a near complete unlock of the economy post the first wave of Covid. In addition, the wider divergence between GVA and GDP in Q4 at 210 bps (a historical record) expectedly was an outcome of one-time adjustment in food subsidy bill from FCI to central government’s balance sheet, as announced in the FY22 Union Budget.

Key data takeaways

• On a sectoral basis, industry led the momentum with growth expanding by 7.9% in Q4 FY21 compared to 2.9% in Q3. Within industry, exceptionally strong growth was seen for construction (+14.5%), along with electricity (+9.1%) and manufacturing (+6.9%). Mining sector however disappointed as growth remained in contraction for the 8th consecutive quarter.
• Improvement in services remained muted in comparison; nevertheless, a turnaround from -1.2% in Q3 to +1.5% in Q4; the sub-sector of trade, hotels, transport & communication remained in mild contraction, at -2.3%; reflecting the still incomplete recovery in contact-based sectors. On the other hand, sub-sectors of real estate, professional services etc. along with public administration posted modest growth at 5.4% and 2.3% respectively.
• On the demand side, consumption and investment both recorded a robust pick up in Q4, supported by Government spending. To be specific, Government consumption expanded by a phenomenal 28.3% while GFCF (i.e., Gross Fixed Capital Formation) suspected to be led by Government capex (on roads, highways etc.), rose by 10.9%. Private consumption, on the other hand, clocked a tepid growth at 2.3% but positive nonetheless after remaining in contraction over Q1-Q3 FY21.
• Core GVA i.e., headline GVA excluding agriculture and public administration, a closer proxy of private sector activity, expanded by 4.1% compared to 0.7% in Q3.
• For FY21, agriculture growth at 3.6% remained the lone positive, with both industry and services in deep contraction (at -7.0% and -8.4% respectively), the Q4 recovery notwithstanding.

The big picture

Q4 growth recovery was premised on multiple positives such as a low base combined with demand recovery, Government’s capex push, robust exports, and strong corporate performance of India Inc.

However, exuberance of Q4 FY21 has proven to be ephemeral, with the second wave of Covid becoming unexpectedly severe since mid Apr-21. The staggered imposition of lockdowns by most states, which became pervasive in May-21, are expected to weigh on sequential growth momentum in Q1 FY22. Impact is expected to be most severe on contact-intensive services yet again with industry too struggling to operate amidst labour migration, workforce safety concerns, supply chain disruptions and importantly slackening demand. At this juncture, it is however important to caveat, that economic activity remains considerably above the trough seen in Q1 of FY21 at the time of complete nationwide lockdown. In addition, owing to a low base from last year, annualized growth in Q1 FY22 is likely to look superlative, which needs to be assessed carefully. Nevertheless, slippage in sequential growth momentum in Q1 FY22 makes us believe that there could be some downside risks to our FY22 GDP growth estimate of 10%.

Having said so, we do acknowledge the silver linings as well, amidst the ebbing of the current wave of infections

• Global growth expectations have got marked up in recent months led by strong doubling down of fiscal policy support in the US and continuation of extremely accommodative monetary policies by major central banks. A supportive global economic backdrop will support India’s exports, which continue to show some degree of resilience despite the state level lockdowns.
• Although India’s vaccination drive has lost momentum off late, it is expected to pick up pace in the next 2 months via augmentation of existing domestic capacity as well as possibility of greenfield production and imports. Currently, India has covered near 12.5% of its total population with a single dose of Covid vaccine. This could potentially move towards 50% before the end of 2021. This critical mass of vaccinated population would not just boost consumer confidence and enhance mobility, but it would also help in normalizing significant part of economic activity from COVID related disruptions. This remains a developing story.
• As the COVID wave ebbs, rural consumption could find support from a normal monsoon, forecast for which has now been upped to 101% of LPA by the IMD, along with record level of food grain procurement and Government schemes providing income or subsidy support to rural populace.
• Last but not the least is the supportive domestic policy environment characterized by countercyclical fiscal impulses reinforced by the FY22 Union Budget amidst an accommodative monetary and liquidity backdrop that RBI remains committed to.

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

Chart 1: Wedge between GDP and GVA owing to one time subsidy adjustment