What The Q1 GDP Numbers Say

Context: Taking a cue from higher growth in Q1 2021-22, government must increase expenditures to push consumption and investment.

Key insights from India’s 20.1% Q1 GDP growth

• High numbers due to base effect: That is, because of contraction of 24.4% in Q1 of 2020-21. Even with this high growth, the magnitude of real GDP in 2021-22 fell short of the corresponding level in 2019-20 by a margin of Rs.3.3 lakh crore.
• Continuing pandemic: Indian economy would have done better in Q1 of 2021-22 had its performance not been beset by the adverse impact of COVID-19’s second wave.
  • While the economic impact of the first wave was more severe, the health impact of the second wave was more serious.
• Optimistic 2021-22 growth prospects: An average growth of 6.8% in the remaining part of the year would enable the Indian economy to meet the annual growth of 9.5% as forecast by both the Reserve Bank of India and the International Monetary Fund.
  • This should easily be feasible since there would still be the benefit of base effect and demand is about to strengthen with recovery.
  • Sectors like trade, transport et. al and financial, real estate et al., construction and electricity, gas and water supply have already started showing a robust recovery.
• Recovery in private consumption demand is lagging behind: Private final consumption expenditure (PFCE) contributes 56.5% to the demand (2018-19 to 2020-21).
  • In Q1 of 2021-22, PFCE grew by 19.3%, whereas the contraction in Q1 2020-21 was 26.2%.
  • Policy shall focus on sectors which have high propensity to consume: Since private consumption depends largely on income growth and its distribution, it would be useful to focus on further supporting income and employment levels for the MSMEs and informal sector.
• Positive shifts in exports and investments:
  • Exports grew by 39.1% over a contraction of 21.8% in Q1 of 2020-21, that is, a positive growth of 8.7% over the export level in the corresponding quarter of 2019-20.
  • Gross fixed capital formation (GFCF), registered a growth of 55.3% in Q1 of 2021-22, though it remains 17.1% lower than the corresponding level in Q1 of 2019-20.
• A fall in government final consumption expenditure (GFCE): With reference to Q1 of 2020-21, GFCE in 2021-22 registered a contraction by margin of (-) 4.8%.
• Growth in agricultural sector: Agricultural sector showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
  • But, its contribution to overall growth is limited as agriculture accounts only 15% of GDP.
• Fiscal prospects: A significant policy space is opening up for the government to raise its demand and its contribution to output.
  • Fiscal data of the Controller General of Accounts shows that the Centre’s gross tax revenues (GTR) grew by 83.1% in April-July of 2021-22 over the corresponding period of 2020-21 and by 29.1% over the corresponding period of 2019-20.
  • The Centre’s fiscal deficit in the first four months of 2021-22 amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.

Conclusion: Even a growth rate of 9.5% in 2021-22 will mean that over two years, the Indian economy had an annual growth rate of 1.1%. The real test of Indian economy will be to continue 7% growth rate from 2022-23.