Wages Fall But Corporate Profitability High: India’s Surging GDP Numbers

India’s gross domestic product (GDP) for the first quarter of 2021-22 grew at 20.1% compared to a contraction of 24.4% in the same period a year ago. India’s GDP is estimated to be at Rs 32.38 lakh crore compared to Rs 26.95 lakh in the same period on a year-on-year (YoY) basis.

After Covid-induced lockdowns crippled lives and livelihoods, the first quarter GDP figures seemingly look like the harbinger of good news. But the surge in growth figures were primarily driven by low base of last year, which makes the jump look significant.

“The number is a historic high because of the low base effect and masks the impact of the second wave in the quarter. When compared to FY 2019-20, GDP growth contracted by over 9%. The pandemic impact on consumption and investment is high as expected,” said Rumki Majumdar, economist, Deloitte India.

The devil lies in the details of the first quarter growth story. Private final consumption expenditure grew 55.1% in the first quarter of 2021-22 compared to a growth of 55.4% a in the same period a year ago. Government final consumption expenditure grew 13%, falling from a growth of 16.4% in the same period a year ago.

“Consumption spending has lagged suggesting that pandemic uncertainties are weighing on their finances and outlook. With risks looming over pent-up demand, the biggest driver of growth may take a while to take off,” Majumdar said.

Private consumption makes up more than half of India’s economy. First quarter figure for private final consumption is 11.9% lower than FY20 level and 5.2% lower than FY19 level. Fixed investment in comparison to FY20 levels is 17% lower and 6.1% lower compared to FY19 levels. “Only on government expenditure, we are higher than FY20 and FY19 levels. And in that too, the margin is not very large. For the first quarter has fallen by 4.8% but has gone up by 7.4% in comparison to FY20 levels and 9.3% up by FY19 levels. Looking at all this, it gives an indication that consumption growth is likely to remain sluggish in the near term also,” Devendra Kumar Pant, chief economist, India Ratings and Research said.

Most sub-sectors that saw a surge in growth had seen contraction in the same period a year ago. Mining and quarrying in this quarter recorded a 18.6% growth compared to a 17.2% contraction a year ago. Manufacturing recorded a 49.6% growth compared to a contraction of 36% a year ago. Trade, hotels, transport, communication and services related to broadcasting grew by 34.3% compared to a contraction of 48.1% in the first quarter of 2020-21.

Agriculture, fishing, and forestry though, recorded an increase in growth to 4.5% in the first quarter of 2021-22 compared to a growth of 3.5% in the same period a year ago.

Indian economy was experiencing a slowdown even before the Covid-19 pandemic struck. But income distribution has been significantly altered in the last one year. Companies had good corporate profitability in FY21, while wages fell and workers lost their jobs. However, the corporate sector gained at the expense small enterprises and households, who have had to see their savings dip as loans to GDP ratio increased.

“Wages growth has been falling and hence consumption growth in the last four-five years has slowed down. That consumption was done either by dipped at savings or by leverage buyout. Personal loan to GDP has gone up while household savings to GDP ratio has fallen,” Pant said.

Investment increased 55% in inflation-adjusted terms, but remained 17% lower than April-June 2019 levels. Exports reported a 39% growth year-on-year, primarily because there was no complete lockdown this time.