Next week, the government will release the September quarter report card on India’s economic growth, detailing how each sector performed and what it means for the rest of the fiscal year.
For markets, the data is like a rear-view mirror—it helps them get confirmation on how much of their hopes and expectations have come true. Beyond that, this review enable in adjusting future speed. Economists believe that the September quarter performance will bring good news in this regard.
Numerically, the GDP growth expectations are within a wide band of 7.8-9.6% across analysts, simply because it would also have the noise of the base effect.
Recall that in the September quarter 2020, the GDP shrank 7.44% as the economy struggled to get back to its feet after the first wave of the pandemic led to one of the strictest lockdowns.
Even on a sequential basis, this year’s numbers may look out of trend because of the pandemic’s second wave in Q1FY22. That said, an assessment of the economy’s rebound from the pandemic’s blow can be arrived at.
Here, analysts believe that services will show the sharpest rebound given the gradual opening up of most activities across states. From malls to movie theatres, most services have opened up to full capacity or at least partial capacity. “Relative control over new infections, and a large increase in vaccination helped improve services sector activity. Indeed, while supply shortages weighed on manufacturing, the services recovery scaled greater highs during the past quarter,” point out analysts at Barclays Securities (India) Pvt. Ltd in a note. With nearly 68% Indians having received at least one dose of the covid-19 vaccine and 32% fully inoculated, the demand for services is expected to keep up in the coming quarters as well. Another factor helping services is that the economically well-off, having spent on goods so far, will now turn to demand more of services, points out Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets (India) Pvt. Ltd in a note.
Amid wider inequality due to the pandemic, the rich have been spending more on goods after the lockdowns were lifted. The fact that the import of consumer goods has been 32% above normal even as local production levels are below normal points to this spending, Bhandari explained. The upshot is that much of the rebound in GDP will come from services in the September quarter and in the quarters ahead.
That does not mean that manufacturing will trail behind. DBS analysts expect gross value added (GVA) growth of manufacturing to show 8.5% growth, faster than services. Indeed, the upbeat sentiment in the run-up to the string of festivals has meant that Indians have increased purchases of goods. This pent-up demand along with easing unemployment would show up in a faster manufacturing sector growth. But the biggest bugbear of manufacturing has been the disruption in supply chains globally that has hit production. Given that these disruptions persist, manufacturing growth would be under pressure for the rest of the year.
That brings us to the agriculture sector. Here, analysts believe that farm output will be robust given normal monsoon distribution barring brief spells of trouble. Further, the rabi season output is also expected to be robust which would mean that farm sector growth will be higher than historic average for FY22. Given most sectors will show a healthy rebound, some analysts have also raised their FY22 growth forecasts from what they projected earlier. For instance, State Bank of India’s (SBI) research wing now expects GDP growth to be 9.3-9.6%, up from their earlier expectation of 8.5-9.0%. Goldman Sachs and UBS Securities, too, have increased their forecasts. According to HDFC Bank analysts, India’s economy will reach pre-pandemic output levels by the end of FY22. Be that as it may, the pandemic will leave behind scars, one of them being a fall in the potential growth rate for the country. Bhandari of HSBC estimates that the potential growth rate for India has slowed to 5.5% from 6% just before the pandemic. The real challenge for the economy is reaching its higher potential growth level.
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