GDP expands 8.4% in Q2 on high spending, exports, agri

India’s gross domestic product (GDP) grew at 8.4% in the three months ended September, exceeding expectations, on the back of increased government spending, exports and agriculture.

At ₹35.73 trillion in 2011-12 prices, the September quarter GDP was marginally higher than ₹35.61 trillion in the quarter ending September 2019. It means the latest growth figure is not just because of a favourable base effect, as the economy was battered by the Covid-19 pandemic.

Also Read | State of the economy, beyond the latest GDP numbers

A Bloomberg poll of economists expected growth to be 8.1%. In its October meeting, the Reserve Bank of India’s monetary policy committee projected September 2021 GDP growth to be 7.9%. Most analysts responding to Tuesday’s data see the Indian economy growing at around 9.5% in the year to March 2022, in line with estimates by the central bank.

To be sure, this is not the first time in the post-pandemic period that quarterly GDP numbers have been higher than the pre-pandemic value. India’s GDP growth was positive in the quarters ending December 2020 (0.5%) and March 2021 (1.6%) as well, which means the GDP numbers were not lower than the pre-pandemic values.

The highest ever contraction of 7.3% in 2020-21 was basically a result of a contraction of 15.9% in the first half (April-September) of the fiscal year. At ₹68.11 trillion, GDP in the first half of 2021-22 was 4.4%, lower than its pre-pandemic level in 2019-20.

The sequential rebound in GDP between the June and September 2021 quarters was impressive. The economic disruption of the second wave of the pandemic, which peaked on May 9 in terms of seven-day average of daily new cases, led to a 16.4% contraction on a quarterly basis in the three months ended June 30.

The September quarter numbers show 10.4% sequential expansion, which suggests the economy recovered quickly as mobility restrictions were eased. That India’s vaccination programme gained momentum in the second quarter – share of fully and partially vaccinated adults increased from 6.2% and 22.8% on June 30 to 25.4% and 43.5% on September 30 – must have generated tailwinds for the economic recovery. As of 6:30pm on November 30, 47.9% adults had been fully vaccinated while another 36.2% were partially vaccinated.

Beyond the headline numbers, there is cause of concern, primarily because the recovery does not seem to be broad-based. Private final consumption expenditure, which is the largest component of GDP in terms of expenditure, was still 3.5% less than in September 2021.

This means a revival of demand is critical for economic recovery. What seems to have driven the growth is a boost in government investment and exports. Gross fixed capital formation, which measures the investment component of GDP, and net exports were the only two main components of GDP in the September quarter that were higher than their September 2019 values.

A sector-wise analysis of the gross value added (GVA) numbers supports this point. The September GVA number exceeding its September 2019 value is a result of recovery in agriculture and manufacturing, while empolyment-intensive, non-farm sectors such as construction and trade, hotel, transport, communication and broadcasting services continue to lag pre-pandemic levels.

The latter sectors had a 30.5%share in overall employment, as per latest (2019-20) data from the Periodic Labour Force Survey. The inertia in non-farm, employment-intensive sectors, when seen in the context of persistence of high demand for rural jobs guarantee work and sluggish rural wages, suggests a weakness in employment and income opportunities for blue-collar workers in the economy.

While the numbers may strengthen the case for the central bank continuing with its non-interest-rate actions to tighten liquidity, the emergence of a new Omicron variant of the Sars-CoV-2 virus is a cause for concern, and may well hold RBI’s hand in sucking out liquidity too soon, analysts said.

The latest GDP data show the Indian economy continued recovering “robustly,” and just because of the base effect, it cannot be called “less-noteworthy”, India’s chief economic adviser Krishnamurthy V Subramanian said. The growth momentum is sustained and “India is likely to have double digit growth in 2021-22, 6.5-7% in the next (fiscal) year, and 7% thereafter on seminal second generation reforms,” he said.

It was too early to assess the impact of new Omicron variant on the economy, Subramanian said, but established Covid-19 protocols and rapid vaccinations will help.

“We reckon that the nascent recovery ahead may partly still be led by capital and profits and may have traces of a scarred and segmented labour market (as seen by slowing rural demand) and sub-optimal effective fiscal policy stimulus. However, exogenous demand drivers in the form of exports and sustained government capex will need to create a growth bridge till private investment and consumption recover optimally” said Madhavi Arora, lead economist at Emkay Global Financial Services, a brokerage. “To policymakers’ credit, a public investment push appears key to their growth revival strategy,” she added.