India: Economic growth records best result since Q1 2020 in Q1, but strong performance will not last
Economic growth gained momentum in the first quarter of the calendar year 2021 (Q4 FY 2020), with GDP expanding 1.6% on an annual basis (Q4 CY 2020: +0.5% year-on-year). Q1’s reading marked the strongest increase since Q1 CY 2020.
The upturn reflected improvements in private consumption, public spending, fixed investment and exports. Private consumption bounced back in the first quarter, growing 2.7% year-on-year and marking the best reading since Q4 CY 2019 (Q4 CY 2020: -2.8% yoy). Government consumption also rebounded, surging 28.3% in Q1 (Q4 2020: -1.0% yoy). Fixed investment growth picked up to 10.9% in the quarter from 2.6% in Q4 CY 2020.
On the external front, exports of goods and services rallied, jumping 8.8% year-on-year in the first quarter, which marked the best reading since Q1 CY 2019 (Q4 CY 2020: -3.5% yoy). In addition, imports of goods and services recovered, surging 12.3% in Q1 (Q4 CY 2020: -5.0% yoy). As a result, the external sector subtracted 1.0 percentage point from growth, contrasting the 0.4 percentage-point contribution in the prior quarter.
Looking to Q2 CY 2021 (Q1 FY 2021), underlying growth momentum is unlikely to be sustained, due to the second domestic wave of Covid-19 infections and ensuing restrictions. However, the hit to GDP should be much milder than during the first wave in 2020, and headline economic growth will still be elevated due to the highly favorable base effect.
Commenting on India’s GDP outlook, analysts at Nomura noted:
“Before the second wave derailed growth momentum, India’s economy was experiencing a continued improvement through Q1 2021 […]. Although the second wave will likely constrain sequential growth momentum in Q2, we expect the damage to be significantly less than during the first wave and less than currently feared. Already, states are taking the first steps towards relaxing lockdowns, which suggests the peak hit to growth is behind us (in May), with June to be better in sequential terms.”