Recovery rolls back to 8.7%

by Manasi Swamy

The second wave of Covid-19 infections is clouding Indian economy’s prospects of recovery from the worst ever contraction suffered in 2020-21. On April 1, 2021, we had projected that the economy would grow by 9.2 per cent in 2021-22. Our expectation was that real GDP would grow by 28 per cent in the first quarter of 2021-22 over the 24.4 per cent contraction witnessed in the first quarter of 2020-21. But we now believe that GDP growth during the June 2021 quarter will get arrested at 22 per cent as fresh Covid-19 cases have increased three folds in the last 25 days, compelling many state governments to impose fresh curbs on mobility and businesses.

While the second wave of Covid-19 infections is much severe and the healthcare system is unable to cope with the crisis adequately, curbs imposed this time are less stringent compared to the nation-wide lockdown observed last year between March 25, 2020 and May 31, 2020. It is only the state of Maharashtra, Karnataka, Rajasthan and NCT of Delhi which have drifted into a near lockdown situation. Curbs in most other states are much lighter in the form of night curfews, weekend lockdowns, ceiling on number of participants in social gatherings such as weddings, etc. Fewer restrictions imposed this time ensure that India’s GDP in the June 2021 quarter does not drop as low as it did in the June 2020 quarter. However, it will still be 9 per cent lower than its pre-Covid level in real terms at Rs.32.9 trillion.

A part of the consumption demand that we lose due to these curbs is expected to get unleashed in the subsequent quarters. We, therefore, revise our real GDP growth forecast for 2021-22 downwards by only 50 basis points to 8.7 per cent. The forecast assumes that India’s second wave of Covid-19 infections peaks in mid-May 2021 as projected by scientists at the Universities of Washington, Michigan and the Indian Institute of Technology (IIT). And, state governments relax the curbs on mobility and businesses subsequently by June 2021. If the second wave of infections prolongs, India’s GDP will further get impacted negatively. The probability of this is high given the election rallies and large religious gathering India witnessed in April and suspected under-reporting of Covid-19 cases in some states.

Our projection of 8.7 per cent GDP growth for 2021-22 is below consensus. Most forecasting agencies are expecting the economy to grow in double-digits. The government, in January 2021, had projected the economy to grow at 11 per cent. India’s CEA K Subramanian, on April 14, 2021, once again endorsed these numbers, stating that the government did not see a need for any significant revision in its projections yet. In early April 2021, the Reserve Bank of India (RBI) projected India’s real GDP to grow by 10.5 per cent in 2021-22 and the International Monetary Fund (IMF) projected it to increase by an even steeper 12.5 per cent. Credit rating agencies, both international and domestic, scaled down their real GDP growth estimate for India either in the fag-end of March 2021 or in April 2021. Even after these revisions, they expect GDP to grow in the range of 10 and 13 per cent in 2021-22. This implies a 1.3 to 4 per cent rise in GDP over 2019-20.

We expect India’s GDP in 2021-22 to remain nearly at the same level as in 2019-20. Its two major components private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) are likely to struggle to reach their pre-Covid levels. Government expenditure and exports, on the other hand, are expected to increase in excess of their pre-Covid levels.

We expect PFCE to grow by 10.4 per cent in 2021-22, after contracting by 9.8 per cent in 2020-21. At Rs.82.8 trillion, PFCE in 2021-22 will still be 0.5 per cent short of its pre-Covid level. Spending by high and higher-middle income households is expected to drive the PFCE growth. Participation of poor and lower-middle income households is expected to be minimal.

Employment and household incomes have still not fully recovered from the shock of 2020 lockdown. Latest household income estimates available from CMIE’s pan-India Consumer Pyramids Household Survey (CPHS) suggest that average household income, despite recovering from the April 2020 slump, remained 9.7 per cent below its year-ago level in November 2020 in nominal terms. The decline in real terms would be higher.

Number of people employed stood at 398 million in March 2021 as compared to the 2019-20 average of 403.5 million. This implies that of the people who lost their jobs during the first wave of the pandemic, 5.4 million are yet to get their jobs back. This is despite the agriculture sector absorbing over 10 million additional labour in last one year. The job losses are seen predominantly among salaried people, of the order of 9.8 million, followed by businesses at 4.2 million. Preliminary estimates of CMIE’s CPHS survey show that unemployment has risen further in April 2021.

Households are in a mood to limit their spending to necessities and saving for the future in view of the uncertainty caused by the pandemic. Of 5,372 households across 13 major cities surveyed by the RBI in March 2021, only 24.7 per cent expected spending on non-essential items to increase in 2021-22. This is the lowest percentage since May-July 2020 and the second lowest in the history. Households curtailing discretionary spending is a big downer for the Indian economy that derives 55-60 per cent of its real GDP through private consumption.

We expect GFCF to increase by 11 per cent in 2021-22. This will be only a partial recovery from the 13.7 per cent slump witnessed in 2020-21. The growth will be mainly led by government’s capital expenditure. The Central Government has budgeted for a 26.2 per cent increase in capital expenditure in nominal terms for 2021-22. The private sector is not expected to expand capacities.

Average capacity utilisation of manufacturing units stood at 66.6 per cent in the December 2020 quarter, according to the RBI’s OBICUS survey. We believe that corporates that put their expansion plans on a backburner after the first outbreak of Covid-19 will start going aggressive on capacity expansion only when they utilise 75 per cent of their existing capacity. This does not look possible in the current fiscal given the large gap and the resurgence of Covid-19 infections.

Demand for real estate is expected to grow, but only modestly with strict curbs being imposed in large cities like Mumbai, Pune, Bangalore, NCR of Delhi. Besides, banks have started rolling back the concessions they offered on home loan rates last year. The Real Estate Sentiment Index, constructed by Knight Frank India in association with FICCI, shows that consumers remain modestly optimistic on real estate. But their optimism has fallen substantially since December 2020.

Avoidance of a hasty and blanket lockdown amid the current Covid-19 wave has saved the Indian economy from the big hit GDP took last year. However, the weak and stressed healthcare infrastructure, and policy snafus can prolong India’s recovery.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.7 -0.4
Consumer Sentiments Index
Base September-December 2015
54.8 -1.0
Consumer Expectations Index
Base September-December 2015
56.6 -0.5
Current Economic Conditions Index
Base September-December 2015
52.0 -1.7
Quarterly CapEx Aggregates
(Rs.trillion) Jun 20 Sep 20 Dec 20 Mar 21
New projects 0.96 1.41 1.16 1.52
Completed projects 0.28 0.73 0.83 0.88
Stalled projects 0.11 0.08 0.31 0.14
Revived projects 0.68 0.29 0.11 0.14
Implementation stalled projects 0.09 0.07 0.15 0.30
Updated on: 06 May 2021 9:28AM
Quarterly Financials of Listed Companies
(% change) Jun 20 Sep 20 Dec 20 Mar 21
All listed Companies
 Income -27.7 -6.3 1.6 11.7
 Expenses -27.9 -10.3 0.1 6.6
 Net profit -40.5 47.2 57.7 53.3
 PAT margin (%) 5.2 8.3 8.5 13.3
 Count of Cos. 4,401 4,402 4,376 274
Non-financial Companies
 Income -37.4 -10.5 0.2 16.2
 Expenses -37.7 -14.2 -0.7 12.8
 Net profit -56.0 31.5 54.3 34.1
 PAT margin (%) 4.5 8.1 8.9 13.4
 Net fixed assets 5.9 9.2
 Current assets 0.7 11.1
 Current liabilities -2.7 -15.8
 Borrowings 8.3 -11.0
 Reserves & surplus 4.2 21.4
 Count of Cos. 3,267 3,267 3,253 200
Numbers are net of P&E
Updated on: 06 May 2021 9:28AM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.4 0.0 -6.4
 Expenses 13.8 0.0 -7.3
 Net profit 15.2 -10.4 0.9
 PAT margin (%) 2.1 2.1 10.0
 Assets 9.8 8.1 0.7
 Net worth 8.4 4.4 -0.1
 RONW (%) 3.8 3.5 11.7
 Count of Cos. 30,871 29,514 44
Non-financial Companies
 Income 14.1 -1.9 -6.7
 Expenses 14.3 -1.6 -7.8
 Net profit 21.7 -20.6 1.3
 PAT margin (%) 2.9 2.4 10.6
 Net fixed assets 5.6 9.4 -0.2
 Net worth 8.0 2.1 -0.2
 RONW (%) 6.4 5.0 13.2
 Debt / Equity (times) 1.0 1.1 0.1
 Interest cover (times) 2.3 2.0 21.9
 Net working capital cycle (days) 73 80 37
 Count of Cos. 24,702 23,523 36
Numbers are net of P&E
Updated on: 04 May 2021 1:37PM