Why Is India's Q1 FY22 Double-Digit GDP Growth Deceiving?

India's economy continues to recover with a 20.1% sharp rise of GDP in Q1, FY22 (April to June), compared to 24.4% GDP contraction during the same period in FY21 - due to strict lockdown. Additionally, Gross Value Added (GVA) increased 18.8% in Q1, FY22, while construction and manufacturing GVA have marked 68.3% and 49.6% growth compared to 49.5% and 36% shrinkage, respectively in the last year. Mining and quarrying activity too witnessed 18.6% higher GVA than a 17.2% dip in the last year. The agriculture, forestry, and fishing sector's GVA increased 4.5% in Q1, this year, compared to 3.5% in Q1, FY21, while it was the only sector that witnessed growth back then.

The RBI earlier estimated that the Q1, FY22 will see a GDP growth of 21.4% and a 9.5% growth for the fiscal. Healthy capital spending by the union government and state governments, growth in exports, and considerable demand from the agri-sector are behind this robust growth.

Why deceiving?

However, why this double-digit GDP growth is being tagged as a 'deceiving' figure by economists? ICRA, a credit rating agency has already identified that this quarter India's GDP will grow around 20% which will be 'deceptively high'. This is solely because of the low base effect, as mentioned above - India's GDP growth in Q1, FY21 narrowed by 24.4%. As the pandemic impacted with its first wave, the economy was not ready to face the shock of lockdown. India was already struggling with a falling GDP for the last few years and economists were highly concerned because of that.

A government data previously accepted that "The growth in real GVA during 2019-20 has been lower than that in 2018-19 mainly due to relatively lower growth in mining and quarrying, manufacturing, electricity, gas, water supply, and other utility services, construction, trade, repair, hotels and restaurants, and financial services." So, the pandemic worried policymakers. In the last year, the service sector (apart from healthcare), along with mining and manufacturing sectors were impacted mostly, which drove the economy downward.

Not just in India, globally, even developed economies too were affected amply. Hence, though Q1, FY22 GDP growth seems relatively great, as the government says, it 'bounced back', but this is all because of the low base effect. Industrial output had increased 45% in Q1, FY22 as compared to a low base of 35.6% shrinkage in Q1, FY21. Also, India's GDP grew only 1.6% in Q4, FY21 compared to a 0.4% growth in Q3, FY21 - this can show the slow pace of economic recovery due to the tight lockdown nationwide.

Regarding this, Nobel laureate economist Abhijit Vinayak Banerjee earlier commented, "The economy is going slow due to the Covid situation. Earlier the IMF had said GDP growth would be 12.5%. Now it is saying it would be 9.5%. I apprehend it might go down to 7%. Another wave will decrease it further. If the country's economy does not improve, the state will not be able to move forward alone."

However, as the lockdown and restrictions have been relaxed now in most of the states, economic activities are growing. A healthy vaccination drive is also helping more people to come out for work and the production ecosystem is thriving. So, in the next quarter (Q2, FY 22 - July to September), the GDP growth is expected to show considerably good figures.