The corporate earnings season following the July-September quarter (Q2 FY 20-21) turned out to be a strong one for India. A large number of corporates beat earnings expectations of analysts based on stronger than expected revenues and cost savings.
With the anticipation of further normalization of activities in the near future, earnings upgrades significantly outweighed downgrades for a large number of corporates following the results season. The number of other high-frequency indicators also recorded better growth in recent months.
This has led to an interesting twist in the debate around the pace of recovery in overall economic activities in the coming months ahead of the upcoming GDP data and the RBI MPC meeting over the next about ten days.
Downgrades stopped; we saw a few upgrades too
Expectations around economic activities had been markedly weak since the beginning of FY 20-21 as the economy went into the clutches of a lockdown. Several high-frequency indicators recovered a bit during June and July.
Still, not only expectation of a sizeable contraction in real GDP in India remained strong, a large number of forecasters, including policymakers and reputed agencies continued with a further downgrading of FY 20-21 growth expectations during Q2 FY 20-21.
The RBI, in its early-October MPC meeting, not only projected an unprecedented 9.5 percent contraction in GDP in FY 20-21 but also acknowledged further downside risks to their forecasts.
In comparison, the International Monetary Fund (IMF) projected a contraction of 10.3 percent in India during the same period.
However, fresh downgrades in expectations of India’s FY 20-21 GDP forecasts seem to have come to an end in recent weeks. Several analysts have started highlighting the strengthening of the green shoots. While still not large in number, a few forecasters, including rating agency Moody’s, have even revised their estimates upwards during November, indicating now a smaller contraction in India’s GDP during FY 20-21.
Recovery at an uneven pace
We also recently revised our Q2 FY 20-21 GDP growth forecast upward from -12 percent y/y earlier to around -10 percent now, based on several high-frequency indicators (such as PMIs, GST collections, power demand, freight movement, auto sales).
However, we continue to maintain caution as regards the pace of recovery in the coming quarters as one cannot rule out frontloading of activities by corporates during Q2 to an extent, especially closer to the festive season.
It might be prudent to continue watching some of the high-frequency indicators closely, and a somewhat more uneven pace of recovery remains our baseline expectation in the near future.
Several on-ground pieces of evidence – such as uneven festive season sales momentum, inventory position with dealers in various industries, packaging industry demand – support that view.
Fundamentally, of the key drivers of growth, given the uncertainties around investments and exports and limited government spending headroom, the recovery prospects currently hinge critically on the uptick in private consumption. However, barring a quick turnaround from its current unprecedented lows, the weak consumer confidence in urban areas act as a headwind at the moment.
GDP flat over two years
It is logical to expect a strong rebound in GDP prints during FY 21-22, likely in high single digits. Recovery in growth prints should be heavily frontloaded -- H1 FY 21-22 growth will likely be in strong double digits.
However, one cannot overlook that the optics of recovery in FY 21-22 can be over-optimistic and, thus, misleading, reflecting the mere statistical effects of an abysmally low base.
For instance, even after penciling in the high single-digit growth, our current estimate for India’s FY 21-22 GDP remains a tad lower than FY 19-20 GDP.
Effectively, if one attempts to normalize the excessive fluctuations in growth prints, India’s GDP growth rate looks set to stay close to zero for two consecutive years, FY 20-21 and FY 21-22, that too provided recovery expectations do not disappoint during FY 21-22.
The need to stay sufficiently accommodative
The overall macro backdrop poses a difficult challenge for the RBI. Despite the recent uptick in expectations, it is unmistakable that the dent in growth is huge even on a medium-term basis. That underscores the need for the RBI to maintain an adequately accommodative stance in the coming months. In this context, the MPC’s October statement highlighting the commitment to “continue with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year – to revive growth on a durable basis” remains most relevant and appropriate.
The prevalence of headline inflation significantly above the MPC’s upper tolerance band of 6 percent for several months has not only negated the possibility of a rate cut in the upcoming MPC meeting.
Still, it has also triggered doubts about whether the RBI may start withdrawing some of the policy accommodation triggered during 2020. A case in point is the heavy banking sector liquidity. However, one feels that the central bank need not rush on that given that growth in overall bank credit had been sub-6 percent y/y.
Growth in industrial credit had been close to zero. While retail loans grew 9.2 percent y/y, as per the latest data, that too softened materially from 16.6 percent a year ago.
The rising fiscal deficit is also due largely to shortfalls in government revenue rather than for large spending on-ground. Thus, it is unlikely that the prevailing large quantum of liquidity or the rising fiscal deficit had been reasons behind the current high inflation.
We continue to believe that India’s inflation trajectory can go surprisingly lower in the coming months with likely rising ease of mobility and fewer supply disruptions.
We are far from any demand overheating and pricing power in case of most industries is still weak amid the absence of demand overheating. While international developments in recent weeks suggest an uptick in commodity prices and global inflation, we feel that the potential buffer from domestic factors on India’s inflation trajectory can materially outweigh global factors providing the MPC with the necessary headroom to rightly “look through the current inflation hump”, even though the recent prints stay far beyond the level of the RBI’s comfort.
--Siddhartha Sanyal is Chief Economist & Head of Research in Bandhan Bank. Views are personal.
