India on course for 9% GDP growth in FY22, 3rd wave still a concern

New Delhi:- The high GDP growth despite low base of last year has given confidence that the Indian economy may well grow over 9 per cent in FY22 with tailwinds coming from rapid recovery of manufacturing and construction sectors.

The data released by the Union Ministry of Statistics on Tuesday showed that the country’s GDP has recovered swiftly to clock a growth of 20.1 per cent in the April-June quarter of FY22 as against a contraction of 24.4 per cent seen in the same period of previous year.

There has been a 49.6 per cent growth in Manufacturing and 68.3 per cent growth in construction. However, much of the growth is due to the low base in Q1 FY21.

Though the Q1 growth is a tad lower than RBI’s expectation of 21.4 per cent growth, it is still on course to make a good recovery taking the economy back to its pre-Covid size.

According to a Bank of Baroda economic research, GDP is expected to grow at 9.7 per cent in FY22. The improving pace of vaccinations, government tax collections, exports and corporate investments in select sectors are a tailwind for growth, it has said.

Taking a similar line, a report by Kotak Institutional Equities expects GDP growth of 9 per cent in FY22 against RBI’s own projections of 9.5 per cent growth. But the brokerage has cautioned that growth momentum may get disrupted if a third wave of the pandemic comes before a larger population gets fully vaccinated. Furthermore, one of the key drivers of growth in CYTD21 has been robust external demand, which risks slowing given the increasing Covid cases globally.

Additionally, surging freight costs and container shortages amid logistic bottlenecks pose downside risks to growth. So may be the pressure of lower agricultural yield this year in the wake of projections of lower than normal monsoon.

Morgan Stanley research has maintained its estimate of GDP growth at 10.5 per cent for F2022.

“We expect economic activity to start normalising from quarter ending (QE) September, supported by pent-up demand, ramp-up of the vaccination drive, favourable policy mix, and robust global growth. We expect GDP growth to move into positive territory on a two-year CAGR basis from QE September,” it said in its report cautioning that slowdown in the pace of vaccinations, trend in Covid-19 cases and restrictions on activity poses risks to smooth recovery of the economy.

An SBI Ecowrap report had brought more realistic picture of the Indian recovery suggesting that the second wave has still put a lot of sectors on path of degrowth in Q1 compared sequentially with previous quarter (Q4FY21).

Industry, which was the worst affected sector during the pandemic, rebounded sharply in Q1 FY22 (grew by 46.6 per cent) due to 49.6 per cent growth in Manufacturing and 68.3 per cent growth in construction. However, much of the growth is due to the low base in Q1 FY21.

Services sector exhibited a YoY growth of 11.4 per cent, however, on a Q-o-Q basis the sector contracted by 11.8 per cent. Though, the growth has seen in ‘financing, insurance, real estate & bus Services’ but ‘trade, hotels, transportation’ and ‘Public administration and Defence’ has contracted significantly on a Q-o-Q basis, the SBI Ecowrap report said.

On the expenditure side, due to base effects the y-o-y growth in Q1 FY22 private final consumption expenditure has been at a record 19.3 per cent. However, when we look at the Q-o-Q metrics, there is a degrowth of 17.4 per cent. And if we compare with Q1 FY20, the degrowth is 11.9 per cent. “Thus, the recovery has not happened as Indian households faced the brunt of the second wave in Q1. Another troubling aspect to the consumption story is that the Government Expenditure, which grew by 12.7 per cent in real terms in Q1FY21, has displayed degrowth of 4.8 per cent Y-o-Y and -7.6 per cent Q-o-Q. Government support to consumption expenditure declined despite the second wave,” the report said.

Agriculture sector has been the one that has been pandemic resilient. Its output is 8 per cent above pre-pandemic level. A below normal monsoon poses a risk to its growth in FY22.

But according to BoB research manufacturing and construction activity are likely to do well on the back of exports and government spending. Contact intensive services sector is likely to recover with a lag and rising infections in certain states pose a risk to services recovery.