India Q3 GDP growth comes in lower at 5.4%

The National Statistical Office (NSO), affiliated to the Ministry of Statistics and Program Implementation (MOSPI), announces the quarterly GDP exactly 2 months after the end of the quarter. Consequently, the annualized GDP for the Dec-21 quarter was announced by the NSO on 28th February. The Dec-21 GDP was always expected to be lower compared to 20.3% in Jan-21 quarter and 8.5% in the Sep-21 quarter. And lower it surely was.

In a way, it is normalization of GDP growth considering that the base effect has been gradually waning now. However, the positive takeaway is that the GDP for the Dec-21 is now growing decisively over the corresponding Dec-19 quarter which shows the pre-COVID period. For instance, real GDP for Dec-21 quarter grew by 5.4% YoY, but it was up by a very robust 6.2% above the Dec-19 levels. It looks like India is getting over the COVID jinx.

In a way, the GDP growth in the Dec-21 quarter should have been still better, had it not been for the Omicron lag effect, which left a rather deep imprint in Nov-21 and Dec-21. In fact, Reuters economists had first projected Q3 GDP growing 6.3% in their first estimate which was later scaled down to 6%. However, actual GDP growth for Q3 has come in another 60 basis point slower at 5.4%. The Omicron effect has surely been potent.

Hold on, inflation is hampering real GDP growth

This is an interesting way to look at why real GDP growth is facing headwinds. Real GDP growth is nothing but nominal GDP growth adjusted for the inflation factor. Logically, higher the inflation, lower will be the real GDP growth even on constant nominal GDP growth. In technical parlance, this is the GDP deflator. So, when you refer to 5.4% real GDP growth in Q3, it is the nominal GDP adjusted for the inflation effect, using GDP deflator.

By now, the significance must be clear of how inflation enters the real GDP story. Let us look at some numbers. For Dec-21 quarter, the real GDP was Rs.38.22 trillion; 5.4% higher compared to Rs.36.26 trillion in Dec-20 quarter. During the same period, Nominal GDP for Dec-21 quarter stood at Rs.63.03 trillion compared to Rs.54.49 trillion in the Dec-20 quarter, representing nominal GDP growth of 15.7%. This 10.3% difference is due to inflation factor.

In the above instance, we only considered 1-year comparison of real GDP and nominal GDP. If  you consider a 2 year period then real GDP is up 6.2% but nominal GDP is up 22.9%? The last 2 years have seen sharply higher inflation in consumer and producer goods; as evidenced by CPI and WPI inflation. The inflation impact has been so severe in last 2 years that a +22.9% nominal GDP growth tapered to just 6.2% real GDP growth.

If you look at the various segments of GDP growth in the third quarter and compare with the Dec-10 quarter, then economic activity is higher in all the segments except in trade, hotels and tourism. That is understandable considering that this is a highly contact intensive business and will take time to revive. In other trends, agriculture has been stable while exports and imports contributed substantially to the growth in GDP in Q3.

As India prepares for Q4 GDP numbers, to be announced on 31-May, there are some major imponderables. Firstly, crude is now at $110/bbl and showing no signs of relenting. Secondly, the Russia Ukraine war is likely to create a vicious cycle of supply chain bottlenecks. Thirdly, higher inflation has been factored in, but the cost of Fed hawkishness is still an X-factor. If Q3 was uncertain, Q4 GDP will be the real challenge for Indian economy.

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