GDP, Dec’20 Quarter – Too Little To Celebrate…

GDP (Gross Domestic Product) for quarter ended Dec’20 (Q3’FY21) recorded a marginal growth of 0.4% as per the data released by MOSPI (Ministry of Statistics and Programme Implementation) today. Even though the growth, after two quarters of decline of 24.4% and 7.3%, is a relief, it looks quite tentative. For one, this is lower than the general estimates of clocking 1-1.5%. Second, it was propped up by increase in government spending, without which, it would have again contracted. And most importantly, some important sectors continue to remain in the negative zone – leading to K shaped recovery – which can pull down other sectors if persists for long. The highlight of the quarter is strong pickup in financial & other services and construction, both of which grew at 6%+ after decline of over 7% in Q2’21. Here is a brief analysis of GDP and its constituents.

As per the MOSPI release, Indian economy recorded GDP of Rs 36.22 lakh crore during Oct-Dec’20 quarter (referred as Q3 henceforth) against Rs 36.08 lakh crore a year ago (constant prices, 2011-12 base). In comparison, GVA (Gross Value Added) at Rs 33.4 lakh crore grew more rapidly at 1.0%. the quarter is quite unusual as the difference in growth of GDP and GVA is quite large. This is because of lower government taxes (net of subsidy) which stood at Rs 2.84 lakh crore, 6.3% lower than previous year. (GDP is equal to GVA plus net government taxes). However, this is most likely, due to higher subsidy outgo rather than lower tax collection. The figure had declined to as low as Rs 1.31 lakh crore in Q1, the peak of lockdown.

Sectoral Analysis – 

GVA is analysed across eight sectors – Agriculture, Mining, Manufacturing, Electricity (& other utilities), Construction, Trade (hotels, transport etc), Financial (& other services) and Public Administration (& defence etc). Net government tax is added to this to arrive at GDP.

In terms of sectors, Financial, real estate & professional services recorded the highest growth at 6.6%, significant relief after a decline of 9.5% in Q2. Sector’s performance has been quite unusual as instead of recovering, it had recorded higher decline in Q2 than Q1. A possible reason was significant reduction in real estate activity because of general risk aversion leading to higher savings by households rather than real estate investment. Significant incentives provided by various state governments, with lower stamp duty coupled with lower interest rates, possibly helped the sector record a comeback in Q3. Construction was another growth driver during the quarter growing at 6.2% after a decline of 7.2% in Q2. It may be noted that construction was the worst hit in Q1 declining by almost 50%.

Manufacturing, the most important sector has recorded growth of 1.6%. The segment has seen significant revision in previous two quarters figures. While Q1 decline is lower at 36% from 39% as per the revision, Q2 has contracted by 1.5% against earlier projection of 0.6% growth. Manufacturing and construction sector absorb significant number of blue collared workers and their growth is critical to provide opportunities to this segment.

The biggest concern relates to Trade segment (Trade, hotels, transport, communication etc) which continued to decline, albeit a lower 7.7% against 15.3% and 47.6% in the previous two quarter. In absolute value, the sector has suffered decline of Rs 4.1 lakh crore in GVA this year so far. Assuming about 35% of this going towards salaries, employees in these segments have shown salary erosion of almost Rs 1.4 lakh crore. As per EPFO data, while payroll addition in other sectors has picked up, it is still low in trade segment. While the manufacturing sector is critical to absorb blue collared workers, trade segment is critical to provide employment opportunities to urban youths who may have basic qualification but lack any technical degree. The continued high unemployment is urban area is significantly attributable to lack of growth pickup in this segment. Public administration, driven by government expenditure, also declined by 1.5%, against over 9% decline in previous two quarters.

Expenditure Analysis –

GDP is also calculated from the expenditure side and is equal to amount spent by the three segments – expenditure by households for consumption purpose called private final consumption expenditure (PFCE), expenditure by government called Government final consumption expenditure (GFCE) and expenditure on creating physical assets or investment called gross fixed capital formation (GFCF). Approximate share of the three were 57%, 11% and 29% in FY20. (The rest is exports minus imports and others).

Despite the festival and pent-up demand, PFCE remained in the contraction zone with decline of 2.4%. GFCE was lower by just 1.1%, significant improvement from decline of 24% in Q2. Government expenditure is still Rs 87,000 crore less than in Q1, which had provided some support to otherwise disastrous quarter.

The most important is the turnaround in GFCF which grew by 2.5% against decline of 6.7% and 46.5% in the previous two quarters. In absolute terms, GFCF was Rs 11.93 lakh crore, which had shrunk to as low as Rs 6.6 lakh crore in Q1. Investment had begun its decline even before Covid-19, similar to manufacturing sector and a pick-up in this is essential to bring economy back on track.

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