Q2 FY22 GDP Growth Preview
The Q2 FY22 GDP print to be released on 30th November is likely to register a growth of 7.8% y-o-y. On a Gross Value Added (GVA) basis, we expect growth of 7.3% y-o-y. The gap between GDP and GVA is likely to be driven by higher tax revenue collection and lower subsidy pay-outs in this quarter.
- On a sequential basis, GDP is expected to rise by 9.75% in Q2 FY22, vs. a contraction of 16.9% in Q1 FY22, as economic activity gathered pace in the second quarter supported by pent up demand, a pickup in vaccination drive and easing of second wave related restrictions
- GVA is expected to increase by 6.8% q-o-q in Q2 FY22 vs. -13.3% in the previous quarter
- The divergence between the GDP and GVA is due to upbeat tax collections in Q2 FY22. Government’s net tax revenue clocked 59.6% of BE in FYTD22 vs. 28% in the same period in FY21. On the other hand, total subsidies stood at 54% of BE in FYTD22 as compared to 69% in the same period in FY21.
Economic activity update:
With support from pent up demand and easing of mobility restrictions in the country, economic activity (as captured by a number of high frequency indicators) moved above pre-second wave levels in early August and has remained robust since then (as per our Weekly HDFC Economic Activity Index). This is in line with improvement seen in other high frequency indicators like, PMI, exports, GST collections, etc.
Taking stock of high frequency activity indicators: Activity indicators released in Q2 fared better. Higher frequency indicators such as PMI, GST collections, E-Way Bills, non-oil non-gold imports improved in Q2. While PMI manufacturing rose to 53.7 in Sep-21 from 52.3 in Aug-21, non-oil non-gold imports expanded by 18% on m-o-m basis in Sep-21. GST collections rose to INR 1.17 lakh crore in September, up 23% from same time last year. The average gross GST tax collections have been at INR 1.15 lakh core in Q2 FY22, up from INR 1.10 lakh crore in Q1 FY22.
Economic activity indicators continued their upward trajectory in October as well, with PMI manufacturing hitting a 8 month high of 55.9 and services PMI hitting more than a 10-year high of 58.4 in Oct-21. Passenger Vehicles sales too surged by 24.5% m-o-m in Oct-21 (vs. -24.6% in Sep-21), boosted by demand ahead of the festive season. We expect momentum in economic activity to improve further with support from Rabi Sowing and Government capital spending.
Forecast: GDP growth expected to grow by 9.4% y-o-y in FY22 . We expect the economy to reach prepandemic output levels by the end of Q4 FY22. For FY23, we expect GDP to grow by 7.5%
A closer look at Q2 GDP numbers
Base effect at play – to some extent: Some part of the expected 7.8% y-o-y GDP is due to a low base from year when the economy contracted by 7.4% (in Q2 FY21). That being said, there is likely to be a sequential improvement in GDP growth in Q2 FY22. On a sequential basis, GDP is expected to grow by 9.75% in Q2 from a contraction of 16.9% in the previous quarter, reflecting a revival in economic activity.
For Q2 on the supply side, we expect both the industry and services to expand on a sequential basis. On the demand side, growth is likely to be driven by consumption (both private and government) and investment. Government’s non-interest revenue expenditure rose by 15.05% in Q2 FY22 as compared to a contraction of 7.3% in the previous quarter. High frequency indicators show that consumer durables and non-durables rose in Q2 FY22 while auto sales remained subdued. Share of both private consumption and government consumption expenditure in GDP is likely to rise in Q2 FY22.
On the other hand, net exports are likely to be a drag. Monthly trade data shows that exports grew by 7.5% q-o-q while import growth rose by 16.2% in Q2 FY22. Trade deficit widened to USD 44.7 bn in Q2FY22 from USD 31.4 bn in Q1 FY22.
On the Production side, we expect GVA to expand by 7.3% in Q2 FY22
- Agri GVA is likely to grow by 4.0% y-o-y in Q2 FY22. As per 1st advance estimates, Kharif Crop
registered a record high production of 150.5 mn tonnes this year. - Monthly trend in PMI manufacturing, IIP, auto sales, diesel consumption indicate that
manufacturing output is likely to have risen in Q2 FY22. The Industrial production index
manufacturing expanded by 7.0% q-o-q in Q2 FY22 as compared to a contraction of 12% in the
previous quarter. - In addition, looking at company results, profit after tax (PAT) expanded on a q-o-q basis across
most sectors due to an improvement in net sales. This is likely to get reflected in manufacturing
gross value added in Q2 FY22.
On a sequential basis in Q2 FY22,
- FMCG net sales and profit after tax expanded
- Consumer durables net sales and PAT expanded
- Auto ancillaries net sales and PAT expanded while cement net sales and PAT contracted
(Refer exhibit 2). - Mining and electricity output are expected to have slowed on a sequential basis
- On the services side, PMI services remained in expansion zone for the third successive month in
Oct-21 (contracted in Jul-21). On the other hand, indicators such as cargo traffic, passenger traffic
expanded sequentially in Q2 FY22. Credit growth averaged 6.5% in Q2 FY22 vs. 6.0% in Q1 FY22
