GDP grows 8.4% in Q2; demand, services drag down economic activities

GDP remained almost flat, barely managing to expand 0.3% over the pre-Covid period of Q2 FY20

The economy grew 8.4 per cent during the second quarter of 2021-22 as the pace of vaccination rose and Covid-induced restrictions were eased. However, growth was largely on account of the low base of a 7.4 per cent contraction during the corresponding period of the previous year.

Thus, gross domestic product (GDP) remained almost flat, barely managing to expand 0.3 per cent over the pre-Covid period of Q2 FY20. This implies that though the economy is in recovery mode, the pace is yet to accelerate.

The economy, while growing 20.1 per cent year-on-year in Q1, had contracted 9.2 per cent against the corresponding pre-Covid period of FY20. With this, the economy expanded 13.7 per cent during the first half this fiscal year. But it contracted 4.4 per cent compared to the pre-Covid period.

Chief Economic Advisor Krishamurthy Subramanian said India was likely to have double-digit growth this fiscal year.

It is largely the services sector, which constitutes 57 per cent of the economy, that applied the brakes on growth. Of the three broad categories, it was the only sector that contracted during Q2 of FY22 over the corresponding period of FY20.

This was largely due to trade, hotels, transport and communication services, which fell 9.2 per cent during THIS period as this was the last sector to see restrictions from Covid-induced state lockdowns easing.

Financial, real estate, and professional services, which are the biggest segment within services, also declined albeit at a lower rate of 2 per cent over this period over the same period in FY20.

Within industry, it was primarily construction whose growth fell to 0.3 per cent over this period because September saw unusual rain and this segment was one of the last within the secondary sector to see restrictions lifting.

Manufacturing, which is the biggest segment of industry, grew almost 4 per cent during the second quarter compared to the corresponding pre-Covid period. It was the agriculture sector that saw higher growth vis-a-vis the pre-Covid period compared to year-on-year. (See chart.)

On the expenditure side, private demand came in the way of growth. Private final consumption expenditure, denoting demand in the economy, dipped 3.5 per cent over this period. This also tamed investment growth to just 1.5 per cent despite businesses going for inventories in the pre-festive month.

KEY INDICATORS

• Private final consumption expenditure rises 8.6% YoY in Q2FY22, but contracts 3.5% compared with Q2FY20
• Gross fixed capital formation expands 11% YoY, but growth slides to 1.5% compared with Q2FY20
• Govt final consumption expenditure was up 8.7%, but declines 16.7% vis-a-vis pre-Covid period

CRISIL Chief Economist D K Joshi said private consumption was yet to show a decisive recovery.

Nikhil Gupta, chief economist, Motilal Oswal Financial Services, said: “The broad story remains intact. With a weak household sector, consumption may continue to lag.”

Rajani Sinha, chief economist at Knight Frank India, said a more broad-based consumption recovery would be critical for sustainable growth.

“For that to happen it will be critical for the unorganised sector and micro, small, and medium enterprises to bounce back.”