The National Statistical Office (NSO) will release GDP statistics for the quarter ending September today (November 27). There is near unanimity that they will mark a significant improvement from the massive 23.9% contraction seen in the GDP numbers for the quarter ending June. The Reserve Bank of India’s internal model expects a GDP contraction of 8.6% in the September quarter. A recent research note by Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets, expects the contraction to be 7.9%. However, there is more to the second quarter GDP numbers than just the headline figures. Here are four things to keep in mind while looking at the GDP numbers.
India’s relative performance vis-a-vis other major countries
On March 24, India imposed one of the most stringent lockdowns in the world to contain the spread of the Covid-19 pandemics. Economic activity came to a standstill for a large part of the April-June quarter. This led to a disproportionate fall in India’s GDP in this period. Data from the Organisation for Economic Cooperation and Development (OECD) shows that India’s GDP contraction was the steepest among all G-20 countries. Most countries for which the September quarter data is available have shown an improvement compared to the June quarter. China is the only G-20 country that has managed growth in both the June and September quarters. India’s economic recovery should be judged on the basis of its performance vis-a-vis other major economies rather than an improvement over the June quarter’s performance. This is even more important because India’s GDP had been decelerating even before the pandemic struck, which means that there could be a favourable base effect on this year’s numbers.
Difference between nominal and real GDP growth
These are the last GDP estimates before the budget . The December quarter’s GDP numbers will be released on February 26, by which time the Union Budget is likely to have been presented. Nominal GDP figures matter because they constitute the base for revenue collections. The government has not made any projections for the revenue impact of the pandemic so far. This is not just a statistical question. There has been a demand for greater fiscal stimulus from most quarters and the ability to do this will depend on the revenue situation of the government. The nominal growth numbers will be interesting for one more reason. The post-lockdown phase has seen a rapid increase in retail inflation. Food inflation has been growing at double digits in September and October. While inflation hurts the poor, it generates tailwinds for the government’s revenue collections as well. However, a look at past data shows that periods of high retail inflation need not translate into periods of high nominal growth . This is because the composition of the Consumer Price Index basket and the GDP deflator are vastly different.
The trajectory of investment demand
Consensus is that there has been a sequential (month-on-month) recovery in the Indian economy, but the jury is still out on how much of it is because of pent-up/festive demand. This is linked to the question of the long-term damage the pandemic has done to the economy’s growth potential. The growth in investment demand in the September quarter will offer a useful insight on this question. If businesses believe that a large part of the recovery is being driven by pent-up demand because of supply disruption during the lockdown or just a festive season spike, then they are unlikely to commit to new investments. Investment demand has been contracting continuously since the quarter ending September 2019. An impressive recovery in investment demand would signal optimism about the long-medium term prospects of the economy.
How significant are today’s GDP numbers for the rest of the fiscal year?
The pandemic’s large-scale economic disruption has led to a drastic change in the way economists track the economy. Because GDP numbers come with a significant lag, more high frequency indicators are being used to get an idea about the latest state of economic activity.
Experts are already trying to project the state of the economy beyond the first half (April-September) of the current fiscal year. In a recent research note, Samiran Chakraborty, chief economist, India, at Citi Research, noted that a sharp improvement in rural wages and a healthy Rabi (winter) crop could soften the impact of lower government support in the second half the fiscal year. To be sure, he also expects a “tapering of sequential consumption momentum in the second half of the fiscal year as the impact of pent-up demand and forced savings wanes”.
Another note by Pranjul Bhandari notes that t`HSBC’s recovery tracker moderated a tad compared with the early-November highs after a quick rise in September and October, led partly by pent-up and festive demand.