-7% GDP IN FY21 – WHY IS IT A ONE-OFF?
India’s Q4FY21 GDP growth at 1.6% YoY was positive for the 2nd consecutive quarter. However, FY21 GDP de-grew by 7.3%. Government consumption led from the front in order to pull up the overall GDP. Robust improvement in government expenditure can be attributed to increase in capex spending by both central & state governments. Private consumption showed a small positive growth in Q4FY21 for the first time during the year (55% of GDP). With most of services being subdued throughout the year, private consumption was expectedly poor and the biggest contributor to the FY21 GDP de-growth. While the year gone by has been tough and the start of this year is unassuming, all is not lost.
A careful analysis of the historical GDP growth trends reveal that this is the first time in the past 30 years that India has de-grown which suggests that this is a one-off year and we are sure to bounce back strongly as the situation starts to normalize.
GDP Influencers: Journey from -7% in FY21 to +9.5% in FY22
- Private + Government consumption:
FY21 was a complete washout for the services sector which occupies more than 50% share in India’s GDP. With the steady increase in vaccinations and gradual unlock, we believe the travel & tourism, hospitality and related industries will make a strong comeback. The pent-up demand seen in goods in FY21 will now be witnessed in services in FY22 leading to pickup in private consumption expenditure.
- Investments (GFCF):
Investments witnessed strong momentum in H2FY21 after the Finance Minister urged all CPSEs to expedite capex spends. Nodal agencies like NHAI also increased awarding and reduced milestone payment duration to contractors, thereby witnessing record highway construction activity in FY21, despite the pandemic. With the government having loosened its purse strings despite rise in fiscal deficit, investment momentum should be strong.
Last year when India was in lockdown, there was global lockdown as well which led to a collapse in India’s exports demand. However, in this lockdown, the world is in an unlock mode. This has helped export and export industries pick up the momentum and offset the slack in the domestic economy. Exports’ growth in March ’21, April ’21 and May ’21 have clocked robust growth rates of 60%, 199% and 68% YoY resp.
The 2 biggest factors that determine the impact of lockdown are intensity and duration. The intensity is far lower this year because different states are implementing various partial lockdown measures. Businesses are able to run in some form and are not crippled like last time. Many construction sites and infra activities are being allowed to carry on. On the duration front, last year we saw the country return to normalcy by October; this year most states have already begun unlocking and we expect to return to normalcy by July resulting in lower impact this time.
Household Financial Savings
During last year’s lockdown, fear of job losses and income reduction dominated headlines, instilling fear and responsible for people going completely into saving mode. Lack of spending avenues only aided this behavior. Thus, while income levels may have reduced, expenditure reduction was much more. This led to an improvement in household financial savings. Household financial savings as a % of GDP shot up to 21% in Q1FY21, when GDP was at its lowest level and the high household financial savings was responsible for the consumption boost in the economy subsequently. This time around as well, it gives us a strong reason to believe that consumption will come back in a big way when the full unlock happens.
Improved balance sheets and soft interest rate regime