India’s economy grew by 5.4 percent in Q3 FY22 after exhibiting 8.5 percent growth in Q2 and 0.7 percent in same quarter last fiscal, bringing to the fore pain points inherent as we enter the third year of pandemic.
For the full fiscal GDP growth is expected to increase by 8.9 percent (SBI:8.8 percent) and GVA growth by 8.3 percent as growth seems to have somewhat lost its momentum.
At 8.9 percent, Q4 GDP growth is printing at 4.8 percent. Given the impact (though not so serious) of Omicron variant and Russia-Ukraine crisis in Q4, we believe that Q4 GDP growth would be lower than 4.8 percent pushing down GDP FY'22 real GDP growth below 8.9 percent with downward bias around lower end of spectrum of consensus estimates hovering around 8-10.
The ‘Trade, Hotels, Transport, communication & services related to broadcasting’ are the only sectors which are still not out of woods.
The Q3 absolute numbers of these sectors are still 95 percent lower than the pre-pandemic level (i.e. Q3 FY20). However, If we compare on cumulative basis (Apr-Dec’21 over Apr-Dec’19), the ‘Trade, Hotels, transport, communication & services related to broadcasting’ is still 84 percent of its pre-pandemic level and construction is still 97 percent of pre-pandemic.
On a positive note, during 2021-22, signs of recovery became visible in H1 with credit growth on incremental basis increasing by Rs 5.9 lakh crore (5.4 percent), compared to last year growth of Rs 3.32 lakh crore (3.2 percent) with personal loans, agriculture sector and industry being the drivers of growth.
Deceleration in credit growth in the services sector continued though credit to industry showed signs of improvement. However, ASCBs deposits growth is lagging and grew by 9.1 percent for the fortnight ended 11 February ’22 compared to last year growth of 11.8 percent.
RBI’s latest quarterly statistics indicate muted growth in sequential deposits (Q-o-Q) in the third quarter across demographics which inter-alia vindicates our earlier hypothesis of asymmetrical growth in deposit accretion across various geo-population groups with incremental share in SB and CA facilities vis-à-vis time deposits showing general depositor’s shift to ‘on demand’ mode, to counter the direct fallouts as well as ripple effects.
On the capital formation side, the pickup is inching towards pre-pandemic level but the trend in change in stocks show sharp accumulation indicating the demand is weaning.
A sharp rise in share of valuables also indicate postponement of current consumption and leakage of financial savings to wards precious metals. All the heads under the expenditure side have advanced but still remain below the pre-pandemic level in December 2021.
Private consumption is below the pre-pandemic level and this is largely because labour intensive sector trading and construction have not recovered from the pandemic shock. The recovery in these sector remains patchy. Sharpe rise in share of valuables also indicate postponement of current consumption and leakage of financial savings towards precious metal.
With FY22 nominal GDP now at Rs 2.36 lakh crore compared to the first advanced estimate of Rs 2.32 lakh crore based on which the deficit numbers in the budget were given, fiscal deficit as a percent of GDP will now be revised down to 6.7 percent from 6.9 percent of GDP in the budget. For FY23 nominal GDP growth comes to 9.1 percent from 11.1 percent (given in the budget).
Assuming same growth rate of 11.1 percent on the new GDP numbers for FY22, fiscal deficit for FY23 will also come down to 6.3 percent of GDP from the budgeted 6.4 percent of GDP. Clearly, higher nominal GDP is eating away Government debt, though the dangers of higher inflation are many.
The ongoing conflict between Russia and Ukraine may impact certain high-frequency indicators (like financial markets, exchange rate, crude prices etc.) in the short-term, we believe that at this moment this will not have any lasting impact on the Indian economy.
Core GVA has slowed down to 3 percent in Q3 from 7.3 percent in Q2. Core GVA and PFCE ideally follow the same trend. It thus remains to be seen how does PFCE picks up in FY23, as it will provide the fulcrum of an impending and nascent recovery. As of now, we are not revising our forecast for FY23 at 8 percent, though any further event outlier and / or prolonging of the Ukraine-Russia conflict could act as a clear downside to our growth forecast.
(The writer is Group Chief Economic Adviser, State Bank of India)
