20% GDP growth- Miracle or Mirage?

by Shelly PatwariSept 9th, 2021

The Ministry of Statistics and Programme Implementation has released the GDP (gross domestic product) and GVA (gross value added) data for the first quarter of FY 2021-22. India’s GDP grew by a whopping 20.1% year-on-year in Q1 in line with the market expectations.  This is a base effect. Imagine that GDP in Q1 of FY 2019-20 was Rs. 100. Then it decreased by 25% in Q1 of FY 2020-21 to be Rs. 75. Then in Q1 of FY 2021-22, it rose by 20% to become Rs. 90. As such even though in percentage terms it has risen by 20%, in absolute terms it is Rs. 90 which is lower than even 2019-20 levels. 

Both GVA and GDP growth shows that we are growing at an exorbitant pace, which is boosted by an exceptional favorable base from nationwide lockdown in last year. On a sequential basis, GDP growth contracted by 16.9% over Q4 FY 2020-21. India’s total output levels are nowhere close of what it was in Q1 FY 2019-20, in fact they are close to 2017-18 levels.

However coming to a big picture, as per the report by Acuite Ratings the last week of May-21 saw economic activity bottom-out, pointing towards an uptick in economic recovery. This is validated by high-frequency indicators such as E-way bill, GST collections, exports, Google mobility, Auto sales, Electricity generation, Rail Passenger movements, among others, shifting into swift recovery mode. Exports are booming for the first time in 8 years. Exports hit a record 2.58 lakh crore in July 2021 up 47.9% over July 2020 and 34% over July 2019. This implies compound growth of over 15% a year for two years, and if this is sustained it might just indicate a return to miracle GDP growth.

Quarterly expenditures on GDP in Q1 of FY 2021-22 (Rs. Crore)- 

Source - MOSPI

The table above reflects that for overall economic growth and to boost aggregate demand government should have increased its spending, whereas it has fallen from the last year’s levels itself. Private consumption levels have not been normalized yet. This could be due to a decrease in average household income or maybe the threat of the third wave is still looming large. Improving Consumer sentiments would be the key to recovery.

Some key measures undertaken by the Government in the recent past such as detailing of the Asset Monetization scheme and amendment to the Retrospective Tax is a welcome step and has boosted investor sentiments and will help further drive growth. Moreover, vaccination pace has been seen increasing (69.96 Cr total doses administered as of Sept 8, 2021) and with the festive season setting in, demand recovery is likely to pick up.