Indian economy recovering, eased lockdown restrictions play big role: Kotak Institutional Equities

Real GDP in Q2 FY21 contracted at a slower pace led by easing of lockdown restrictions. Economic activity normalization has continued into Q3 FY21 supported by pent up and festive demand. With the recovery sharper than we had expected, Kotak revised up their FY2021E GDP growth to -8.6% from -11.5%. They remain cautious about the recent pick-up in Covid cases and of any loss in momentum as the impact of pent up and festive demand wanes.

Economic recovery underway from Q2 FY21 led by easing of lockdown restrictions:

Consistent with the normalization in economic activity with the easing of lockdowns, real GVA (Gross Value Added) in Q2  FY21 contracted at a slower pace of 7% while real GDP growth contracted by 7.5%. Recovery in GVA was supported by a slower pace of contraction in industry GVA, led by growth of 0.6% in manufacturing and 4.4% in electricity, even as construction fell 8.6%. Expectedly, agriculture and allied sector’s growth continued to stay robust at 3.4%, supported by robust sowing on the back of favourable monsoons. Services GVA saw an improvement but remained weak at -11.4%, led by a broad-based fall across trade, hotels, transport, communication -15.6%, public administration, defence, and other services -12.2%, and financial, real estate, and professional services -8.1%.

Private consumption and investment contract at a slower pace:

Real GDP growth contracted by 7.5% in Q2 FY21 led by slower pace of contraction in private consumption -11.3% as against -26.7% in Q1 FY21 and in investment -7.3% as against -47.1% in Q1 FY21. Restocking post the lockdown led to a positive growth in inventory levels (6.3%). Meanwhile, government spending, which was a growth driver in Q1 FY21, contracted by 22.2% as government expenditure had to be in check to bridge the shortfall in tax collections. The external sector continued to contribute positively to growth as exports have almost recovered to last year’s levels, while imports fell by 17.2%. After the first half FY21, real GVA and real GDP have contracted 14.9% and 15.7%, respectively. Meanwhile, nominal GDP fell by 4% in Q2 FY21 vs -22.6% in Q1 FY21.
Revise up FY2021E GDP growth to -8.6%:

The normalization in economic activity continued into October, supported by pent up and festive demand. Several high frequency indicators saw a robust positive growth, fueling expectations of a V-shaped economic recovery. The RBI staff estimated in its monthly bulletin that if economic activity retained the momentum seen in October over the next two months, GDP growth may turn positive in Q3 of FY21. However, Kotak is cautious in extrapolating the festive demand to the rest of FY2021E. Kotak expects the recovery to be gradual with growth likely to remain negative over the subsequent two quarters.

They remain cautious about:

(1)    increase in the pace of spread of infections recently which has led to re-imposition of restrictions/night-curfews in certain districts
(2)    lockdowns in Europe and a spike in infection rate in the US likely keeping exports subdued over the next few months
(3)    likely loss of momentum in economic activity as the impact of pent-up and festive demand starts to subside.

Private consumption, especially discretionary spending, is unlikely to remain as buoyant as seen around the festive season. Penciling in the latest GDP print along with the above factors, we revise up our FY2021E GDP growth to -8.6% against our earlier estimate of -11.5%.