Why India's latest GDP numbers are deceptively high

The low base effect from India's second covid wave in April-June 2021 has played out.
Why India's latest GDP numbers are deceptively high
Photo: Adnan Abidi (Reuters)
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India’s economy is certainly growing. But the absolute numbers do not show the whole picture.

India’s GDP grew 13.5% in the April-June quarter from a year ago, according to data released on Wednesday (Aug. 31), registering its fastest annual expansion in a year. This was lower than the 16.2% growth predicted by the Reserve Bank of India (RBI) earlier this month.

But the numbers come with a caveat.

Economists believe that a “base effect” from the April-June quarter in 2021 is manifesting itself. Economic activity in that quarter last year had slowed considerably, when thousands of Indians died in a devastating second wave of covid-19. The new figures are a sharp improvement upon that low base.

“The strong June-quarter real GDP essentially a reflection of a rather low statistical base effect and also a reflection of pent-up demand,” Kunal Kundu, an economist at Societe Generale, told Reuters.

India’s recovery is not broad-based

Looking at the real GDP levels, the economy grew only 3.8% from the corresponding quarter in 2019-20, if one writes off the two pandemic years of 2020 and 2021.

Apart from the implications of the pandemic, there is a distinct expansion in demand for contact-intensive services such as the travel and tourism sector. The country’s manufacturing activity has remained steady.

“The reopening of India’s economy boosted contact-intensive services and private consumption, fixed investment demand surged on lagged effects of easy financial conditions, while in contrast, net exports were a bigger drag on GDP growth,” economists at Nomura wrote in a note.

After the pandemic, India has pivoted towards an investment-led growth strategy rather than the traditional consumption-driven approach. India has also strengthened its export of services.

A slowdown is likely going ahead

Economists argue that the base effect will dissipate as the year progresses. The RBI itself expects quarterly growth to fall to about 4% in the second half of this financial year. If these projections turn into reality, then full-year GDP growth may not even cross 7%.

The ongoing tightening of easy monetary conditions by major global central banks, particularly the US Federal Reserve, is most likely to hamper growth in the coming months.

“We expect GDP growth to sequentially slow hereon, owing to spillovers from weakening global growth momentum, fading of pent-up demand and withdrawal of policy accommodation,” Nomura’s economists said.