GDP is sharply lower in Q4 but focus must shift to growth recovery
The GDP announcement for the fourth quarter ended Mar-20 had few surprises as the fall was factored in. However, Q4 GDP at 3.1% was not as bad as was originally anticipated by the street.
How did the GDP compare?
In a way, the GDP for Q4 marked the continuation of the trend of routinely lower GDP. The trend started in mid- 2018 from a level of 7.7% and over the last 8 quarters the GDP has consistently fallen by over 450 bps. The March quarter may not have seen the full impact of the lockdown since it only accounted for a week. The real impact may be felt only in the first two quarters of FY21. However, it must be admitted that the actual GDP growth for Q4 at 3.1% and for the full year at 4.2% was surely better than most estimates.
What led the GDP lower?
Paradoxically, agriculture saw a bounce in growth from 2.3% to 4%; largely on the back of a robust Rabi crop. This also brings agricultural growth to the target levels of the government. The bigger concern was manufacturing where the growth fell from 5.3% last fiscal to just 0.03% in the current fiscal. But services with the highest weightage of over 60% took deep cuts. Most of key services like financial services, tourism, transport, travel, utilities and other services took deep cuts in Q4. The only saving grace was defence and public spending.
Next two quarters critical?
Clearly, the GDP growth for the fourth quarter is not as bad as some cynical estimates were veering towards. But the real picture will be clear only when the Q1 and Q2 growth numbers come out. The June quarter is likely to be a major wash-out and that is already evident from the deep cuts in PMI and core sector data for April 2020. While most businesses are expected to be largely functional by end of June, the lag effect could sustain for some more time. For example, weak demand, sluggish labor conditions and the absorption of fixed costs may be the real challenges. These are likely to depress growth with most estimates veering towards negative growth in the first two quarters of FY21.
Focus on recovery
Frankly, what happens in the first two quarters may not be really important. What matters is what happens after that. The RBI has cut repo rates by 115 bps and the government has given an overall stimulus package of $270 billion. This may not be comparable to the packages of the US, EU or Japan but the stimulus is big enough. The immediate challenge will be to encourage business with a combination of fiscal incentives and monetary looseness. India has proved in the past that a sharp recovery is perfectly possible if managed well. Managing the recovery in Q3-FY21 is what the government must focus on!
Targeted Keywords – Q4 GDP, GDP growth for Q4, GDP lower, Agricultural Growth, RBI Repo Rates, Stimulus Package, Financial Services