India's GDP grows by 8.4% in Q2 of FY22 against record 20.1% growth in last quarter

New Delhi: Indian economy has gained momentum during the July-September period, inching gradually back to normalcy as coronavirus related disruptions eased significantly in the aftermath of a devastating second wave.

Gross domestic product (GDP) for the second quarter of the financial year grew by 8.4% from a year ago, one of the fastest rates among major economies, data released by the government showed on Tuesday.

A median Bloomberg estimate pegged the GDP print at 8.3% in the September quarter. The economy had contracted 7.4% in the same period last year.

Indian economy has expanded at a record rate of 20.1% in the first quarter, mainly on account of the low base of last year.

In nominal terms, without adjusting for inflation, the GDP growth surged 17.5% during the second quarter under review.

Manufacturing output increased at a pace of 5.5% during the quarter under review, while construction segment grew 7.5%.

Gross fixed capital formation, which is a measure for investments in the economy, surged 11% for the period under review.

After being hit by a devastating surge in virus cases stoked by Delta variant earlier this year, the situation in India has improved in recent months. Daily cases have sunk dramatically to about 10,000 after breaching 4,00,000 in May and the vaccination pace has picked up, instilling confidence in reopening businesses and industries. Streets and markets across the country are now abuzz with activity.

However, with the emergence of the Omicron variant, the economy is not yet out of the woods as the new heavily mutated variant could easily wreck havoc. According to the WHO, Omicron poses a very high risk of infection surges that could have "severe consequences" in some places.

"The GDP growth for Q2 at 8.4% confirms that the economy gained traction in the second quarter. On the supply side, agriculture growth provided support, along with a pick-up in service sector growth at 10.2% as contact-intensive services improved along with financial and real estate sectors. On the demand side, investment growth provided support. The momentum in GDP growth has moved to the positive in the second quarter compared to a contraction in Q1," said Sakshi Gupta, Senior Economist at HDFC Bank.

Meanwhile, private consumption, which is a major contributor to the economy and as measured by Private Final Consumption Expenditure (PFCE) increased by 8.6% in the September quarter.

Mining and Quarrying during the quarter surged 15.4%, while electricity, gas, water supply and other utility services output rose 8.9%.

"The GDP growth for Q2 came a tad lower than our estimates, led by disappointment in recovery of industrial sector, mainly manufacturing. Impressive momentum of vaccination, releasing of the pent up demand mainly in services sector, nascent uptick in private investment appetite and accelerated momentum of government spending in H2FY22 will remain supportive hereon, even as elevated inflation and weak rural sentiments are emerging as risks on the horizon," said Garima Kapoor, Economist - Institutional equities, Elara Capital.

A faster pace of vaccinations and a drop in cases have also led to a pick up in the economic activity during the quarter. However, the latest threat from the Omicron variant looms large, which has already triggered the return of travel restrictions. While the Indian economy is yet to see any impact, the news is weighing on the sentiments in the currency and stock markets.

Services that include hotels and transport segment clocked a growth of 8.2% in the July-September period.

Going forward, the Reserve Bank of India (RBI), which has cut key interest rates to record lows and infused massive liquidity to shore up economy, is widely expected to suck out liquidity before normalising rates amid growing inflationary concerns.

The Central Bank has forecast annual growth of 9.5% in the current fiscal year. Meanwhile, Moody’s expects India's economic growth to rebound strongly, pegging GDP growth of 9.3% for FY22, driven by growing government spending and rising demand.

"The improvement in GDP growth in Q2 is on expected lines. With increased vaccination and economy moving back to normalcy, most high frequency economic indicators have bounced back above pre-Covid-19 levels. Corporate performance as reflected by quarterly results has also been showing healthy improvement in the economy, said Rajani Sinha, chief economist and national director - Research, Knight Frank India.

S&P Global Ratings today kept India's economic growth forecast in the fiscal year to March 2022 unchanged at 9.5% but raised its predictions for the subsequent year on broadening out of the recovery.

"India is learning to live with the virus. Following the peak in Covid-19 cases around mid-year, the stringency index has declined, mobility has recovered, and consumer and business confidence has improved," S&P Global Ratings said in a report.

"GDP growth of 8.4% year-on-year in Q2 turned out to be close to our expectation. The deceleration in annualized growth print is not surprising as it is on account of fading of statistical base effect. Sequentially, GDP expanded by a robust 10.4% quarter-on-quarter. Going forward, we expect the combination of further unlocking as well as a step-up in vaccination coverage to continue supporting sequential expansion, which would also benefit from festival-related demand, revenge spending, and pent-up demand," said Vivek Kumar, an economist at Quanteco Research.