FY21 GDP may see lower contraction

Mumbai IF Ecowrap, the research arm of country's largest lender State Bank of India, is to be believed, then it is likely that the previously published CSO GDP growth for FY21 at -8 per cent might see an upward revision. The new GDP numbers will be released by CSO on May 31.

Based on quarterly GDP numbers in FY21 and full year FY21 GDP estimates, Q4GDP was projected to register a contraction of 1.1 per cent. Based on SBI Nowcasting model, the forecasted GDP growth for Q4 would be around 1.3 per cent (with downward bias).

"We now expect GDP decline for the full year to be around -7.3 per cent (our earlier prediction -7.4 per cent)," says Soumya Kanti Ghosh, Group Chief Economic Advisor Economic Research Department, SBI.

One likely consequence of any upward revision in FY21 estimates is a concomitant decline in FY22 GDP estimates. Even as we ponder over FY22 GDP estimates, Covid-19 infection is still spreading in rural areas. The share of rural districts in new cases is rising quite rapidly during May, even though overall cases have started to decline from the second week of May. It has increased from 45.5 per cent in end-April'21 to 53.6 per cent as per the latest data. Notably, this is same as the peak of 53.7 per cent observed during end-August'20. Top 20 rural districts now account for around 15 per cent of country-wise new cases with hinterlands of Andhra Pradesh, Maharashtra and Karnataka continuing to be the worst affected as per the reported data.

Ecrowrap sums up

• Q4GDP was projected to register a contraction of 1.1 per cent
• GDP decline for the full year to be around -7.3 per cent
• Covid spread in rural areas may impact FY22 estimates
• Most countries with an average GDP contraction of around –0.3 per cent

Though the impact of the second wave on the real economy was initially thought to be much limited (due to localised nature of lockdowns which have, however, now turned into a de facto national lockdown, better adaptation of people to work from home protocols, increased use of digital payments) in comparison with the first wave, our estimates now indicate that there might be nominal GDP loss of up to Rs 6 lakh crore during Q1 FY22 as compared to loss of Rs 11 lakh crore in Q1 FY21.

Real GDP loss would be in the range of Rs 4-4.5 lakh crore and hence real GDP growth would be in the range of 10 per cent-15 per cent (as against RBI forecast of 26.2 per cent) during Q1FY21. However, we believe that in this wave our health crisis has overwhelmed us and hence the impact on GDP in the second wave will be more from health channel than the mobility channel. Sequential momentum of leading indicators is at all-time low.

An interesting point to note is that deposits have shown alternate periods of expansion and contraction in FY22 in first 3 fortnights. It is possible that such expansion followed by contraction could indicate household stress as people getting salary credits in first fortnight are withdrawing it in second fortnight for health expenses/stocking up currency for precautionary motive amidst an uncertain scenario. So far, we have got only 3 fortnights of deposit data and this trend would be validated once we have the complete data in the first week of June.

Another interesting anecdote is that though the real GDP data across countries indicates that the situation has improved over one year (after battling from second/third wave of Covid-19), most of the countries are still in recession and their Q1 2021 (or Q4 FY21) real GDP was in contraction mode, with an average contraction of around –0.3 per cent in the range of -6.1 per cent (UK) to 18.3 per cent (China). Very few countries exited recession in Q1 2021.

Interestingly, had India's growth rate crossed 1.7 per cent in Q4FY21, India would have been the second fastest country after China in terms of GDP growth, and going by our estimate of 1.3 per cent GDP growth India would still be the 5th fastest growing country amongst 25 countries (that have released their GDP numbers so far). We hope for such optimism in terms of Covid-19 numbers and vaccination soon, says the report.