Indian economy in Q2FY22 reaches Q2FY20 levels

Indian economy in Q2FY22 grew 8.4 per cent in line with expectations of India Ratings & Research (8.3 per cent). Economic momentum, which we had seen from the second half of FY21, was disrupted by the second wave. However, the government’s vaccination programme resulted in restoring of confid­ence and people’s mobility significantly increased in Q2FY22. Google workplace mobility indicator suggests it was just 7 per cent lower than the baseline mobility. 

On the production side, real gross value added (GVA) in Q2FY22 reached 100.5 per cent of 2QFY20. Few notable features of Q2FY22 are agriculture registering more than 3 per cent growth for 10 consecutive quarters, GVA of industry groups barring construction; trade, hotels, transport, communication and services related to broadcasting; and financial, real estate and profession services in Q2FY22 was higher than Q2FY20. The services sector, which has highest contribution to GVA, hasn’t recovered from Covid. 

On the expenditure side, real GDP in Q2FY22 is 33bp higher than Q2FY20. Both private and government consumption in Q2FY22 has been lower than 2QFY20 by 3.5 per cent and 16.8 per cent, respectively. Private final consumption expenditure (PFCE) has the highest contribution to GDP and until PFCE growth recovers, it is unlikely to lead to a sustained GDP growth. Also, PFCE growth moves in tandem with wage growth. Based on national account data, wage growth in the economy is showing a declining trend since FY13. PFCE recovery will also have an impact on investment recovery. Although exports and PLI schemes may positively impact the investment in different sectors, PFCE growth will remain the key for a sustained growth. 
 

While government capex (Union government and 24 states) grew 61 per cent in Q2FY22, aggregate capex by private corporates, households and public sector enterprises contracted 19 per cent in 2QFY22. It grew 58.5 per cent in Q1FY22. Households being the biggest economic agent, maximum contribution to value addition, savings and investment are under stress in the past couple of years and unless they come back on track, it will be very difficult to sustain high economic growth. Private capex revival is still slow and limited to select sectors. 

A larger portion of Indian imports are in the form of raw material and intermediate goods. While the global demand has resulted in sharp increase in exports (goods and services) growth, imports have grown faster. As a result, net exports/ GDP has widened to -2.77 per cent in Q2FY22 (Q2FY20: -2.67 per cent and Q2FY21: 0.92 per cent), suggesting current account to turn in deficit Q2FY22. 

Growth numbers in the first half of FY22 should be interpreted with caution as these numbers are mainly due to low base of FY21. As economy limps back to normalcy due to massive vaccination programme, future growth trajectory will largely hinge on the government’s policy support and reforms agenda. Exports growth in FY22 is encouraging, however, the major question is can it be sustained? 

How quickly economic returns from PLI scheme will start accruing and conduct of both monetary and fiscal policy. Although we have been able to increase vaccination coverage to more than 1.23 billion, impact of Omicron is still uncertain and may impact future economic growth. 

The Union government’s fiscal deficit in first seven months of FY22 suggests that the fiscal deficit in FY22 will be lower than the budgeted fiscal deficit of 6.8 per cent of GDP. This will have an impact on government’s borrowing both for the Centre and states. Similar to Union government aggregate fiscal deficit for 24 states in H1FY22 has been 41.5 per cent of their Budget estimate. This will have some impact on market yields. 

Views expressed by the author are personal