By Pranjul Bhandari & Aayushi Chaudhary
India’s April to June (Q1FY21) quarter GDP will be released on August 31. It has been a tumultuous quarter, seeing it all—the spread of a once-in-a-century pandemic, a stringent national lockdown, and a surge in pent-up demand when the lockdown was lifted. The growth print will be important, as it will give a sense of how much the GDP (in levels) has shrunk, providing some clarity on when it could potentially get back to normal (i.e. to pre-pandemic levels).
In anticipation of the national accounts data, there are a few methodological issues and observations we would like to highlight, which should help interpret the growth print better:
In its first estimate, informal sector GDP is proxied by formal sector GDP. This works fine on normal days, but not when the two sectors are diverging.
We believe that the pandemic is likely to have hurt the informal sector more acutely as it comprises of smaller firms with limited economic buffers to withstand shocks. And, if formal sector data is taken to proxy informal activity at such a time, GDP can potentially be overestimated.
We think much of this overestimation will show up in manufacturing data, and a shade of it could also show up in services.
A similar trend was observed during demonetisation. For the first few quarters after demonetisation, GDP growth remained surprisingly high. But alas, through this period, the informal sector continued to be proxied by formal sector growth, thereby arguably overstating GDP growth. All, told, the lack of informal sector data could end up overestimating Q1 GDP. India’s new GDP series (released in early 2015) captures growth in both volume and value-added.
Within manufacturing, the former is captured by the growth in the Index of Industrial Production (IIP), while the latter by profitability and other corporate performance data.
One view this time around is that while volume measures (and even corporate sales) fell precipitously during the quarter (for instance, manufacturing IIP fell 41% y-o-y), measures of value added held up a shade better (see graphic). As such, growth may not be as weak as IIP alone would suggest.
However, it is important to delve into the details before coming to this conclusion. One reason firm profitability did not fall as much as output (or sales), is perhaps due to cost-saving, for instance, from not paying full rent and salaries to contract labour. But, this kind of cost-saving is likely to hurt elsewhere in the GDP pie. For instance, lower rental payment and cuts in contract labour wages by manufacturers could show up as lower growth in (real estate and human resource) services. As such, better performance in ‘value-added’ may well be a zero-sum game, and not a driver of stronger overall GDP.
For Q1FY21, we expect the statistics office to announce a GDP contraction of ~17.5% y-o-y (in the 15-20% contraction range). It is likely that several quarters down the line, when the informal sector survey results are available, this number is revised down to a ~25% y-o-y contraction. For the full year, we expect GDP to contract 7.2% y-o-y (see graphic). We expect negative GDP growth over the April-December 2020 period, before turning positive in the quarter ending March 2021.
Co-authored with Priya Mehrishi, Economics Associate, HSBC Global Research
Edited excerpts from HSBC Global Research’s India Economic Comment (dated August 26)
