Services engine waits for restart
3 min read . Updated: 01 Mar 2021, 05:56 AM ISTA look at the output side of the GDP data shows Indians are still not able to spend on services
India’s gross domestic product (GDP) is quickly heading back to where it was before the pandemic struck—a sign that the recovery has been swift after the record contraction of the fiscal first quarter. GDP in constant prices rose 0.4% from a year ago in the December quarter and is now only 4.8% lower than the March 2020 quarter.
But whether the strength in the recovery will sustain depends on how fast Indians resume their pre-covid shopping with zest. That means services will need to recover fully as demand for goods has already strengthened.
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The December quarter GDP data shows that private final consumption expenditure is still weak. It shrank 2.37% for the quarter, and much of the boost to the headline numbers came from government expenditure and investment.
We should note that private consumption expenditure had shrunk 11.3% in the September quarter and 26.3% in the June quarter. In that context, the narrowing of the contraction is no small feat.
A look at the output side of the GDP data shows Indians are still not able to spend on services.
Gross value added (GVA) growth was 0.99% for the December quarter. This was mostly powered by agriculture and a better-than-expected improvement in manufacturing and construction. Services, on the other hand, continued to shrink, recording a contraction of 0.97% for the December quarter. Again, this is a sharp recovery when compared with the large contractions seen in the previous two quarters.
Analysts believe that the services sector would power up the economic recovery from here on. “Growth over the next few months could be driven by pent-up services demand, particularly with the vaccine rollout progressing," wrote Pranjul Bhandari, chief India economist at HSBC Securities and Capital Markets India Pvt. Ltd, in a note.
Shubhada Rao, founder of independent research firm QuantEco Research, concurs. “Services are contact-intensive, so they would remain a laggard until the stage where vaccine proliferation is widespread. Particularly, the second half of FY22 would see a very strong rebound in services," she said.
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For the December quarter, the rebound has been stronger in financial services, real estate and professional services. But trade, hospitality and transport continue to languish, given the high element of human interaction in these segments. It is there that analysts believe the risks from the second wave of infections pose the biggest threat.
Travel restrictions have not been completely lifted, and the resumption of lockdowns in various parts of the country may crimp mobility further. Moreover, the interplay between the informal and the formal parts of the economy is high among services. A large hotel chain supports numerous informal small establishments, from travel agents to bakeries. While the formal economy dominated by mostly listed entities has shown an impressive rebound, the informal sector is still under pain.
Anubhuti Sahay, a senior economist at Standard Chartered Bank, pointed out that the differences between formal and informal segments are visible in weak household consumption expenditure and the surprise contraction in public administration and other services despite high government spending. “Such deviations possibly underline that the informal sector, though recovering, is still lagging, while the formal sector is quickly reversing to pre-pandemic levels. In all, the data signals that policy support needs to continue," she said.
To their credit, both the government and RBI have put in place enough measures to support the recovery. The Centre’s thrust on capital expenditure is prudent, given that investment generates jobs, which, in turn, would power consumption. But there are risks to the recovery. The resurgence in infections across various parts of the country has increased the risk of fresh lockdowns.
Other factors such as a banking system still hamstrung from large bad loans, weak spending by states and fiscal constriction from lower revenues also stymie the recovery process.
“We expect consumption growth to strengthen only modestly in the near term as a part of the healthier income generation is used to rebuild the savings buffers that were drained during the lockdown by those in the informal sector, contact intensive industries and the self-employed," wrote Aditi Nayar, principal economist at Icra Ltd.
While India’s economic recovery may strengthen, we cannot expect fireworks going ahead.
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