Asia/Pacific February 15, 2021 / 10:58 am UTC

India Growth Heatmap: The Tide is Turning

By Charu Chanana

Bottom line: India’s Q3 FY2021 GDP is likely to turn positive as the activity rebound has been faster than expected due to the decline in number of COVID cases from the September peak. We expect a +1.0% y/y GDP print in the December quarter after two consecutive quarters of decline, primarily due to the consumption rebound from the strong festival and pent-up demand. This will translate into overall 2020 GDP growth of -6.8% against our previous estimate of -8.2%. Vaccine distribution remains the key catalyst but we see little room for incremental activity improvement. Stimulus from both fiscal and monetary policy is likely to continue this year. 

Figure 1: Our Heatmap of High Frequency Indicators (% y/y) Indicates Recovery Strengthening in Q4 (Green = Higher Growth, Red = Lower Growth)

Source: Bloomberg, CEIC, Continuum Economics. *Unit is Index values.

Dash of Optimism from Activity Rebound 

India’s GDP for Q3 FY2021 (quarter ended December 2020) is scheduled to be reported after the close of markets on February 26, and we expect the recovery momentum to continue. After a sharp drop of 23.9% y/y in the June quarter, the economy rebounded faster than expected and the decline in September quarter GDP growth was contained to -7.5% y/y. We expect growth returning to positive territory in the December quarter as a retreat in COVID cases helped activity to rebound faster than expected. We expect GDP growth to come in at +1.0% y/y (vs. -4.5% y/y previously) in the fiscal third quarter, primarily driven by a consumption rebound from the strong festival and pent-up demand. This will translate into overall 2020 GDP growth of -6.8% against our previous estimate of -8.2%. 

Our heatmap of high frequency indicators suggests a strong rebound in consumption indicators. Domestic motor vehicle sales were up by an average of 5.7% y/y in the December quarter from -4.2% y/y in Q2 FY2021. PMI manufacturing and services have strengthened further to fresh highs. However, activity has seemingly cooled sequentially within fiscal Q3 after the peaks in October. December GST revenues remained above INR 1trn for a third consecutive month, which suggests that a moderate consumption rebound has been sustained. The pick-up in investment demand, however, seems to be lagging due to excess inventory, but the boost from the FY2022 budget announcement should help. External demand also remained subdued given the continued surge of COVID cases in the U.S., UK and other key economies into the end of the year. 

Risks down the Road

The COVID caseload hit a peak in September 2020 and concerns of a fresh wave amid the October-November festival period as well as colder weather did not materialize. The 7-day average of daily new cases has recently dropped to under 12k from a peak of 93k in mid-September. As a result, social distancing restrictions continue to ease and activity levels have picked up. Vaccine distribution has also begun, further boosting confidence levels. The future expectations index in the Reserve Bank of India’s (RBI) December consumer confidence survey has also turned more upbeat. However, we remain skeptical of the continued boost to economic activity after the recent surge, as activity levels have returned to near-normal levels in key sectors and full adult vaccination is still too far away to ensure a further rebound.

Meanwhile, an increase in commodity prices, especially industrial metals and oil, might keep investment spending recovery in check for the rest of this year. The scarring effects of the pandemic also cannot be ignored. High unemployment rates and increasing poverty levels, especially for the dominant informal sector of the economy, will likely drag on medium-term growth recovery. We also continue to see risks of a steep rise in nonperforming assets (NPAs) when the RBI’s support measures are rolled back. This suggests a strong reform momentum including a focus not only on improving the ease of doing business but also on generating employment. In addition, the strengthening of household and corporate balance sheets will have to be sustained for India to return to its pre-COVID medium-term trajectory. 

Policy Stimulus to Continue

Fiscal and monetary policy measures have been ramped up after a slow start last year. The recently unveiled FY2022 budget focused on economic growth over fiscal consolidation, and this has created upside risks to our 9% GDP growth target for FY2022. The central bank followed with accommodative measures and there are no signs of liquidity being drained soon. Although we foresee no further rate cuts from the RBI this year, absorption of liquidity will also remain cautious and any deterioration in the current economic progress may open up room for further rate cuts. 

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Analyst Certification
I, Charu Chanana, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.