In Q1, GDP increased by 20% but remains below FY20 levels

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India’s GDP increased 20.1 per cent year over year in the June quarter, creating the impression of a rapid economic rebound, but this was mostly due to a significantly constricted (-24.4 per cent) base.

In absolute terms, real GDP lagged 9.2 per cent below pre-pandemic levels (June quarter in FY20), as the reappearance of Covid-19 infections slowed the economy’s gradual return to normalcy, which was visible in the March quarter.

Manufacturing, construction, energy, and mining all increased quickly enough in the June quarter to counterbalance the year-ago quarter’s significant falls, while important service sectors were unable to fully reverse the trend.

Investment spending, on which the government places bets, increased by 55.3 per cent in Q1FY22, bringing its share of GDP to 31.6 per cent, up over 7 percentage points. However, fixed investment as a percentage of GDP was still lower than in FY20.

Front-loading of capital spending by the Centre, states and CPSEs contributed to the boost in fixed investment, rather than the private investments that have been in the doldrums for quite long. According to data gathered by FE, the total CAPEX of 15 major states increased by 135 per cent year over year in April-June; the Centre’s budgetary capital expenditure increased by 26.3 per cent year over year in the quarter.

On a relatively low base (-26.2 per cent), private consumption gained only 19.3 per cent in the June quarter, showing the harm inflicted by income losses in the aftermath of the second wave and broken consumer sentiments. The endurance of the economy’s two main pillars – consumption and investment – will be severely challenged if the favourable base effect fades significantly in the current quarter.

The customary saviour in times of crisis, government consumption, was slow during the quarter, falling by 4.8 per cent on a large base (12.7 per cent), as the Centre and many states cut revenue spending.

Chief economic adviser Krishnamurthy V Subramanian stated the GDP report “reaffirms the government’s forecast of an imminent V-shaped rebound.” “Industry rebounded sharply, followed by services, while agriculture continued to perform well. Due to a slew of fundamentals already in place, the country is prepared for faster growth in the future.

Real GDP growth remained significantly greater than the 18.8% increase in gross value added (GVA) in the first quarter, owing to a jump in indirect tax collection and restricted subsidy payout. Indirect tax collection increased by 85 per cent year over year in the June quarter, well exceeding the annual objective of only 3% growth.

Supply-chain issues and internal demand compression as a result of income losses resonated across the economy, notwithstanding an increase in India’s item exports from advanced economies. In real terms, the share of exports in GDP increased to 23.7 per cent in Q1FY22 from 20.5 per cent the previous quarter.

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