The SBI Ecowrap research report from the State Bank of India’s Economic Research Department has revealed that positive events improve India’s Q2 GDP projections. Also, the  SBI Ecowrap research report says losses reduced but reasons to remain cautious remain. The report has been authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

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Highlights from the SBI Ecowrap research report:-

- There is a flurry of revisions in India’s GDP estimates which remind us of the famous quote “When the events change, I change my mind. What do you do, sir?” There is ambiguity regarding the famous person who stated these wise words. Some attribute it to John Maynard Keynes and some to Paul Samuelson, both noted economists. Regardless of the source, continuous revisions in GDP estimates have become the norm now.

- We are also revising our Q2 GDP growth to -10.7% (earlier: -12.5%) with positive bias, based on our nowcasting model with 41 high frequency indicators, associated with industry activity, service activity, and global economy. Our estimate of Q2 FY21 (or Q32020) is aligned with the economic growth seen by various economies in Q3 2020. The GDP contraction halved in Q32020 compared to Q22020 for select18 economies.        

- The upward revisions reflect faster recovery and these estimates would have been even better if July and August would have shown even a little bit of traction. The SBI business activity index shows that there is continuous improvement and Q3 numbers could be even better. However, the extent of recovery in subsequent quarters can only be gauged after the actual Q2 numbers are published.

 - There is no doubt that the economy has suffered and scarring remains. The MSME sector has borne the brunt of the COVID pandemic and the ECLGS scheme was a shot in the arm. As on March’20 around Rs 14 lakh crore was outstanding to MSME sector. As per data uploaded by Member Lending Institutions on the ECLGS portal, an amount of Rs. 2.05 lakh crore has been sanctioned under the Scheme to 61 lakh borrowers so far, while an amount of Rs 1.52 lakh has been disbursed with it states like AP, MP, Telangana and Odisha benefitting more. However, if the overall corpus of the ECLGS scheme stays at Rs 3 lakh crore it could be a constraining factor.

- Corporate results remain good and growth in corporate GVA of 3640 listed entities is at 22.06% y-oy- for Q2FY21 and size wise analysis based on turnover shows resilience in small and medium enterprises. For example, entities with turnover up to Rs 50 crore reported only 4% dip in top line and reported reduction in loss as compared to Q2FY20. Similarly, entities with turnover between Rs 100 crore and Rs 250 crore, reported 7% degrowth in revenue while recorded growth of 12% and 8% in EBIDTA and PAT respectively. The good performance in the listed space shows that the dichotomy between the formal and informal sectors has become more pronounced with formal sector doing better than informal sector and the recovery in the small and medium firms in listed space do not translate to overall better situation in the MSME space.

- We also need to reiterate that although the GST numbers provide cheer as in Oct’20 they showed 10% y-o-y growth and are expected to be healthy in Oct’20, the true picture will emerge when GDP data comes. Overall, in May-Sep’20 the retail to wholesale passenger vehicle sales % , which was 99.5% in May-Oct’19, has come down to 83.8% in in May-Oct’20. There are concerns that excess inventory due to tepid sales might raise more problems for dealers. The rising dealer inventory is visible in the outstanding advances availed by them. Also, our conversations with car dealers highlighted that there is more demand for vehicles up to Rs 8 lakh and the vehicles in the range of Rs 8-12 lakh are not seeing traction. This segment could be a gauge of the discretionary spend, and its subdued performance could be a cause of concern.

 - Future prognosis will depend on two things– the shape of the recovery from COVID infections and how fast the vaccine is rolled out. The current trends of COVID-19 infection show that COVID cases in India peaked in September. With Unlock 5.0 and festival season till December end, the chances of possible second wave will increase. The fortnight after Diwali will be crucial and we need to carefully monitor the situation. With domestic vaccine entering Phase III and one more phase to go, COVID-19 recovery will be contingent on how fast the vaccine is rolled out and consumer confidence is restored. The best estimate of full recovery in consumer confidence can be placed in Q3 FY22.