What do Q2 GDP numbers say about India's economic recovery?

Data released by the government yesterday showed that India’s Gross Domestic Product expanded 8.4 per cent from a year ago in the second-quarter ended September, with the economic recovery gaining ground as most states removed lockdown restrictions from July. This was slower than the record 20.1 per cent growth witnessed in the previous quarter which came on a low base. Nevertheless, this marks a fourth straight quarter of GDP growth.

Growth in the second quarter was led by an uptick in consumer spending as well as government expenditure.

But things are not as hunky-dory as they seem.

To know the actual state of the economy we must shift our focus from growth rate to absolute levels of real GDP.

Despite growing by 8.4 per cent year-on-year in the July-September period, the absolute GDP of India stood at Rs 35.73 lakh crore for the quarter. This is slightly more than Rs 35.61 lakh crore seen in the corresponding quarter two years ago. {chart}

After last fiscal’s contraction of 7.3 per cent, the RBI expects the GDP to grow by 9.5 per cent in FY22, once again giving India the tag of the world’s fastest growing major economy.

Some high-frequency indicators show that India’s recovery is gaining momentum. Merchandise exports jumped 42 per cent in October to $35.5 billion while bank credit growth accelerated to 6.8 per cent. Industrial production too expanded 3.1 per cent in September.  

The spread of the Omicron variant of the coronavirus and inflation remain one of the biggest risks in the near term. It has prompted several countries to impose travel curbs.

Indian companies are facing pressure on margins as commodity prices increased their input costs. FMCG companies like ITC, Hindustan Unilever and Parle Products have hiked prices across categories. 

Further, domestic two-wheeler sales fell 29 per cent in the first seven months of this fiscal to a seven-year low. HeroMotocorp, Bajaj Auto, TVS and Royal Enfield have also been raising prices to offset input cost pressures. The sales of passenger vehicles too fell 27 per cent in October.  

It is good news that India’s absolute GDP surpassed pre-pandemic levels but consumer spending has still not caught up to FY20 levels, thus making the ripple effects of the pandemic palpable in the economy.