Evaluating 20 per cent GDP Growth for the First Quarter

10 Sep 2021

The Gross Domestic Product (GDP) numbers printed at 20.1 per cent in the first quarter of April – June 2021-22 (Q1FY22). While in a normal year this would have been considered extremely good, the fiscal year 2021-22 was anything but normal, with the first wave of the pandemic leading to a shutdown of the economy. As a result, GDP declined by 7.3 per cent in the full year and by 24.4 per cent in the first quarter. Naturally, therefore, the GDP was expected to bounce back in FY22, especially in the first quarter, despite the second wave of the pandemic hitting the country during this period. 

What must be acknowledged is that economic activity continued without a blanket shutdown as took place during the first wave in 2020. Sectors that did well in the first quarter include agriculture, construction, manufacturing and trade, hotels, transport and communication while financial, real estate & professional services as well as public administration and defence under-performed. 

Sectoral Growth in GVA at constant prices (% y-o-y growth)

On the demand side, private consumption demand remained subdued given the COVID related restrictions. In contrast, exports and investments provided strong support to overall growth, while government consumption spending moderated. 

Looking ahead, many indicators project an optimistic outlook for the second quarter. Most encouragingly, the number of virus cases has plateaued without the onset of another wave. Vaccination has gathered pace with increasing numbers of people getting at least one dose. As a result, monthly indicators such as GST collection, digital transactions, E-way bills and railway freight reflect an improvement in the economic momentum. 

Of course, contact-based services such as tourism or hospitality remain subdued in view of the fact that continuing COVID cases remain a constraint. As large public gatherings for public festivals or private celebrations continue to be restricted, a full recovery will take some time. 

For a sustained recovery, both public and private investments need to make a comeback. The Government may need to frontload some of its committed spending on infrastructure which would have a beneficial impact on private investment. The objective would be to make industry competitive. Creation of industrial infrastructure such as industrial parks and enabling logistics would lower the cost of doing business, thus encouraging private investments. 

The good news is that global demand and trade are on the rise, with many developed countries recovering at a fast pace, given that stimulus measures have been generous and vaccination coverage is increasing. There is, therefore, scope for ambition in increasing India’s exports. While the first quarter numbers show encouraging strength in exports, this would need to be sustained. 

Finally, the largest component in India’s GDP is domestic consumption which has remained weak in the aftermath of the pandemic. Many households have suffered from job losses and income reductions, which may take time to repair. While the upcoming festive season may lead to a bounce in consumption, getting demand back will require greater income generation. Investment in infrastructure, other than facilitating business, can also set off a multiplier effect through the creation of jobs. 

Coming back to the question of how to evaluate the GDP growth print of 20.1 per cent, it may be noted that while the growth is strong in comparison to a depressed year (FY21), it is lower by 9.2 per cent when compared to the previous year (FY20). The question is how soon we can return to the pre-pandemic GDP level, i.e. the GDP in FY20. 

Can the GDP level in FY22 be higher than that in FY20? The first quarter GDP print seems to suggest that it is possible. A full-year growth of 9.8 per cent in FY22 would make the GDP 1.8 per cent higher than that in FY20. That would bring us back to the pre-pandemic level. To get the economy firing on all engines, India would need to ensure 7-8 per cent growth starting FY23.