Say thanks to agriculture

If the Indian economy eventually does contract at only -7.7%, or better, than that, it has agriculture sector to thank. According to advance GDP estimates, agricultural sector is expected to grow by +3.4% in FY21, on the back of solid performance in the Kharif and the Rabi cropping seasons. Also higher income levels in rural and lower impact of the COVID-19 pandemic have ensured that purchasing power in rural India has not been dented. The only other sector to see positive growth at +2.7% is public utility services like power, water etc. 

Some standard suspects

Putting pressure on the GDP for the full year will be the standard suspects like hotels, trade, transport, construction and many other services. That is hardly surprising. The prolonged lockdown in India has hit tourism & transport sectors the most and it looks unlikely that it can see any significant recovery in the second half of the year. Construction has taken a hit as residential demand has been tepid and the commercial real estate demand has been badly dented by work-from-home (WFH) models. 

Manufacturing holds the key

The first two quarters of FY21 saw GDP contraction of -23.9% and -7.3%. If the GDP has to get to -7.7%, contraction for the full year, we are looking at flat to mildly positive growth in GDP in the third and fourth quarters. Is that really practical to expect? A lot will depend on the manufacturing sector. The advance estimates have pegged manufacturing to contract by over -9.5%. However, if you look at some of the high frequency data points like the PMI manufacturing and the core sector numbers, there are signals that manufacturing activity is picking up faster than anticipated. A lot will depend on how the government looks to stimulate demand in the next few months via the Union Budget. A strong revival in manufacturing could also have a spillover effect on services. 

Worry is on per capita GDP

The advance estimates peg GDP per capita to contract at -8% to -10%. That is due to a combination of a fall in GDP and a rise in population. That means India GDP per capita, which had inched close to $2000, will now end well short of that number. That is the real worry and it means any rating upgrades are ruled out in the foreseeable future. As India’s GDP per capita is already well below Asian, Latin American and East European averages, this is one area that policy makers must focus on. Advance estimates have just highlighted that!