The GDP for quarter ended Sept’20 (Q2’FY21) recorded a decline of 7.5%, as per the data released by NSO (National Statistical Office) today. While the contraction would have been a cause of great worry, it is actually quite comforting in the current circumstances. Another positive for the quarter is growth recorded by manufacturing sector, although marginally, which had declined for three successive quarters even before COVID-19. However, what is intriguing is that government curtailed its expenditure during the quarter without waiting for the full recovery. Looking at the performance, it is quite likely that the economy may be able to restrict full year contraction to about 6-7%, lower than projections of close to 10% made so far. Here is a brief analysis of GDP and its constituents.
GDP vs GVA –
As per the NSO release, Indian economy recorded GDP of Rs 33.1 lakh crore during July-Sept’20 quarter against Rs 35.8 lakh crore a year ago (constant prices, 2011-12 base). This corresponds to a decline of 7.5%, not desirable, yet, a significant recovery against the decline of 23.9% in April-June’20 quarter (referred as Q1 henceforth). GVA (Gross Value Added) stood at Rs 30.5 lakh crore, corresponding to a decline of 7.0%. The difference between GDP and GVA is equal to net tax (tax minus subsidy) collected by government and lower decline in GVA than GDP implies government managed to partially protect its revenues. Net government taxes stood at Rs 2.65 lakh crore, against Rs 3.06 lakh crore a year ago, a decline of 13%. Despite the decline, the figure is almost double the collection of Rs 1.36 lakh crore recorded in Q1. Certainly, this is a number government would be very happy about!
Sectoral Analysis –
While economy’s aggregate figure is represented by GDP, individual sector’s performance is captured through GVA, dis-aggregated across eight sectors – Agriculture, Mining, Manufacturing, Electricity (& other utilities), Construction, Trade (hotels, transport etc), Financial (& other services) and Public Administration (& defence etc).
In terms of sectors, most notable is the performance of construction which recovered from a decline of over 50% in Q1 to post decline of only 8.6%. On q-o-q basis, GVA for the sector is 71% higher than Q1. The performance is more worth noting as July-Sept is usually low activity quarter for construction due to monsoon. The other sector showing a rebound is manufacturing, recording growth, although a modest 0.6%, against decline of almost 40% in Q1 and three quarters even before that. GVA for the segment was Rs 5.8 lakh crore, 65% higher than Q1 figure at Rs 3.5 lakh crore. While part of it would be pent-up demand, yet the performance is significant.
Trade segment (Trade, hotels, transport, communication etc) had another bad quarter, declining by almost 16% on top of sharp decline of 47% in Q1. As per EPFO data, while other sectors are showing movement, payroll addition in trade segment is still significantly lower than previous year. The segment has greater significance as it absorbs maximum number of urban youths who may have basic qualification but lack any technical degree. Financial, real estate & professional services performance is quite intriguing as it is the only sector (other than government led Public administration) which declined more sharply than Q1 – 8.1% against 5.3%. Since the segment comprises of three diverse sub-segments, it is difficult to hazard a guess. However, depressed real estate sector may have affected the performance.
Public administration, driven by government expenditure, shows an interesting trend. The segment has declined by 12.2% during the quarter, higher than decline of 10.3% in Q1, meaning government was more spendthrift. On absolute basis, GVA for the segment declined by Rs 57,000 crore against decline of Rs 43,000 crore in Q1. Opinion could be sharply divided on whether government should have reduced its spending to manage its deficit or should have waited for complete recovery to do so.
Expenditure Analysis –
From expenditure side, private final consumption expenditure (PFCE) declined by 11%, significantly lower than 27% in Q1. While the recovery is not enough, it should be noted that festive season began almost three weeks later this year. This means part of consumption expenditure, which happened in September last year would have spilled over to October this year and would get reflected in Oct-Dec quarter. Government final consumption expenditure (GFCE), as stated above, declined sharply by 22% against growth of 16% in Q1. In absolute terms, government spent Rs 1.24 lakh crore less in this quarter as compared to previous quarter.
However, most important is the turnaround in gross fixed capital formation (GFCF or investments) which declined by only 7% against decline of over 47% in Q1. In absolute terms, expenditure on investments was Rs 3.6 lakh crore, 60% more than in Q1. Investments had also 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. In the absence of private investment, it has to be led by the government which would “crowd-in” private investment.