Growth returns asymmetrically

by Manasi Swamy

According to data released by the National Statistical Office (NSO), the Indian economy exited its contractionary phase in the quarter ended December 2020. India’s national income had declined in two consecutive quarters before it recorded a marginal expansion in the quarter ended December 2020. Real GDP expanded by 0.41 per cent and its real GVA expanded by 0.99 per cent in the December 2020 quarter compared to the year-ago quarter.

The NSO also revised India’s GDP growth estimate for the June 2020 quarter from 23.9 per cent fall to 24.4 per cent fall and for the September 2020 quarter from 7.5 per cent fall to 7.3 per fall. This suggests that the Covid-19 lockdown blow was a little deeper than estimated earlier.

Growth came from agriculture, utilities, construction, financial services and also from manufacturing. Agriculture grew by a robust 3.9 per cent thanks to healthy crop cultivation. Agriculture was unaffected by the virus or the lockdown. It had expanded by 3.3 per cent in the June 2020 quarter and by three per cent in the September 2020 quarter. Utilities were among the least impacted by the lockdown. These shrank by 9.9 per cent in the June quarter but bounced back with a 2.3 per cent growth in the September quarter. Now, in the December quarter they recorded a handsome growth of 7.3 per cent.

The somewhat big turnaround in the December quarter is in the construction sector which recorded a growth of 6.2 per cent after a fall of 49.4 per cent and 7.2 per cent in the preceding two quarters. This shows up in the growth in capital formation as well and it could be the result of some aggressive capital spending by the central government.

The December 2020 recovery is less of a services sector growth story. Financial services have done well. A doubling of profits of financial sector companies could have helped achieve this growth. But, the trade, hotels, transport, storage and communications segment of services continued to contract. And so did the public administration segment. In the real economy it was the mining segment that contracted.

While growth was somewhat widespread along production segments, it was not so well-spread along demand lines. Growth was concentrated in capital formation.

Private final consumption expenditure continued to decline. It contracted by 2.4 per cent in the December 2020 quarter after having contracted by 26.3 per cent and 11.3 per cent in the preceding two quarters. Government final consumption expenditure declined by 1.1 per cent and exports and imports declined by 4.6 per cent each. Valuables declined by 16 per cent.

Private final consumption expenditure narrowed its shrinkage substantially in the December 2020 quarter but it could not revert back to positive growth. Perhaps, this reflects the limits of a skewed pick-up in consumer spending. Consumption demand seems to have been driven by middle and higher-income groups. A majority of these have not taken hits on their incomes and some could have seen a rise in income amid the lockdown. This is evident in the eight per cent growth in listed companies’ aggregate wage bill and a sharp 25.5 per cent growth in income tax collections achieved by the Central Government in the December 2020 quarter.

This probably also explains the phenomenon of the country’s GDP returning to growth despite 14 million jobs being lost in a single year, 2020. Consumer confidence still remains weak. Indices of households’ assessment of current economic situation as per two independent surveys, one conducted by the RBI and another by CMIE, are still lingering around 50-55 as compared to their pre-Covid levels of over 100.

Gross fixed capital formation expanded by 2.6 per cent. Without raising any extraordinary doubts on the growth estimate of capital formation provided by the NSO, we have reservations regarding the inference that can be drawn from this sole source of growth from the demand side of the national accounts statements. It may not be wise to infer that investments have picked up. Not at least in the sense that private investments need to manifest themselves to lend credence to such an inference.

Growth in fixed capital formation in the December 2020 quarter is likely to have been driven largely by central government’s capital expenditure. This more-than-doubled from its level in the December 2019 quarter. But, central government capital expenditure accounts for less than 13 per cent of total GFCF. Households including non-profit institutions serving households account for another 38 per cent of GFCF. It is possible that this segment too, contributed to the turnaround in GFCF as there are reports of a pick-up in demand. But, the reports can be interpreted as opportunistic buys by higher income households and NRIs to reap benefits of low property prices, low interest rates and a favourable rupee. On the supply side too, the favourable factors are transitory. State RERA departments had offered developers an extension of about a year to complete their projects and the government created the Rs.250 billion alternate investment fund to help the sector. This is unlikely to sustain or spread to more households unless incomes rise across the income distribution.

The single largest contributor to GFCF is corporates which generate nearly 50 per cent of the investment demand in India. Corporates were saddled with excess capacity even before the Covid-19 pandemic hit India. Many corporates announced postponement of their capacity expansion plans immediately after the lockdown. CMIE’s Capex database shows that new project announcements by private corporates dropped y-o-y by 21.2 per cent in the June 2020 quarter, by 32.6 per cent in the September 2020 quarter and by 81.5 per cent in the December 2020 quarter. Project completions too fell y-o-y in the range of 70 to 85 per cent during this period. Till corporates don’t start investing aggressively, it would be too early to say that India is seeing an investments-led growth.

A steady slowdown in scheduled commercial banks’ non-food credit growth from 7.4 per cent in April 2020 to 5.8 per cent by January 2021 and a 13.3 per cent drop in equity issuances by private corporates in the December 2020 quarter amid a bull market strengthens our belief that participation of private corporates in GFCF growth was negligible.

Government statistics do not seem to suggest that growth would be sustained in the March 2021 quarter. Implicit GDP estimates for the March 2021 quarter, derived by subtracting first three quarters’ GDP estimates from Second Advance Estimates for 2020-21, show that the economy would once again slip into the negative growth territory. The real GDP growth for the quarter works out to be -1.1 per cent. However, a similar exercise using GVA yields a growth of 2.5 per cent in the March 2021 quarter.

While it is worth appreciating the quick turnaround in growth, it is equally important to note that the growth does not look adequately strong or sustainable. The recovery process needs to be strengthened.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&&tabcode=001001008005000000&repnum=75532&frequency=Q&colno=2&parnum=75531&parfrq=Q
2. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&&tabcode=001001008005000000&repnum=75514&frequency=Q&colno=2&parnum=75513&parfrq=Q