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  • State Bank of India: Ecowrap – GDP grows in Q3FY21 but postulated Q4FY21 GDP decline a statistical aberration reflecting expenditure clean up: GVA a better choice, Q4GVA at 2.7%

    Published on February 27, 2021

    India’s economy exited the recession and grew by 0.4% in Q3 FY21 after contracting 24.4% in Q2 and 7.3% in Q3. India is now one of the few major economies to post growth in the last quarter of calendar year 2020, with improvement in the economy’s performance inversely tied to a drop in Covid-19 infections (even in most of the European economies the GDP contraction became more deep in Q4 2020 as compared to Q3 2020). But as India has seen an uptick in cases over the last few weeks, it has raised the risk of a new round of localised lockdowns. New curbs on movement of people or restrictions on businesses are a risk to the nascent recovery, given that gains in Q3 quarter probably came from the reopening of the economy. Q4 GDP growth is however estimated to decline in Q4 FY21 because of a statistical aberration with food subsidy clean up. GVA for Q4FY21 is at 2.7% and it is a better estimate to gauge economic recovery in the current background when tax numbers are notoriously fickle.

    For the full fiscal GDP growth is expected to decline by 8.0% and GVA growth by 6.5%. For FY22, we still expect that real GDP growth would be around 11% and nominal GDP at 15%.Normally the gap between annual GDP and GVA is less than 70 bps. For the first time in FY21 the gap is whopping 148 bps primarily due to huge decline in net indirect taxes in Q1 (in Q1 the gap was 200 bps). The nominal loss of Rs 13.2 lakh crore in H1 has turned into gain of Rs 2.7 lakh crore in Q3 and is expected to be around Rs 2.8 lakh crore in Q4. For the entire fiscal, the nominal loss would be around Rs 7.6 lakh crore, though we believe that FY21 loss would be still less than the NSO estimate

    Agriculture & Allied activities grew by 3.9% in Q3 FY21 as compared to 3.4% growth in Q3 FY20. For FY21, agriculture is expected to increase by 3.0% as against 4.3% growth in FY20. Industry sector grew by 2.7% in Q3 primarily due to 7.3% growth in Electricity, Gas, Water Supply & other utility services and 6.2% in Construction. Mining & Quarrying is still in negative territory. For FY21, industry sector is expected to contract by 8.2% as against 1.2% decline in FY20. Electricity, Gas, Water Supply & other utility services is the only sector except Agriculture which is expected to grow in FY21. In Q3FY21, the services GDP growth, although negative, has recovered significantly to –1.0%, compared to a decline of –21.4% in Q1 and –11.3% in Q2, mainly due to rise in ‘Financial, Real Estate and Professional Services’, with growth at 6.6%. For FY21, services sector is expected to contract by 8.1% as against 7.2% growth in FY20. The GDP deflator growth for FY21 is estimated at 4.6%, showing a 100 bps increase from FY20. However, going forward the real GDP growth is expected to turn positive and deflator is expected to come down again. Overall, there is upward push in manufacturing, construction and trade, hotels, transport, communication & services related to broadcasting deflator and these are the sectors which have shown the highest GVA decline.

    The real and nominal gross fixed capital formation growth have turned positive in Q3, which is a good sign and hopefully it will translate into better credit demand. Investment scenario, which can be better gauged by the actual tenders floated than announcements, reflects improved optimism in the last quarter (i.e., Q3FY21) with number of tenders published increasing by 23% by numbers and 16% by amount as compared to Q2FY21. Overall, 12240 tenders were published in Q3FY21 with an amount of Rs 2.14 lakh crore

    Corporate, in the listed space, reported better growth numbers across parameters in Q3FY21, as compared to Q3FY20, after improved EBIDTA in Q2FY21 post a dragged Q1FY21. While analysing more than 3000 listed entities, excluding BFSI and refineries, we observed around 5% growth in top line and around 40% growth in EBIDTA. Profit After Tax (PAT) too grew by more than 60% in Q3FY21 as compared to Q3FY20. Sectors such as Automobile, FMCG, Pharma, Cement, Steel, Consumer Durable etc. reported better growth number in all key parameters. With IIP manufacturing growth to remain in the positive territory in Q4 FY21 and bank credit showing a robust growth in January, growth will continue to show some traction. Private final consumption is also expected to grow in Q4 FY21 by 3.1% in constant terms. Most importantly, there is a 2x improvement in rating upgrades during Sept’20 to Jan’21 period as compared to April to Aug’20 period, indicating continued improved in corporate rating profile.