India’s Great GDP Fall: Conscious Kitchen Sinking of Numbers?

‘Kitchen Sinking’ is a term largely used in the Banking Industry. Whenever a new CEO takes over the reigns of a stressed bank (dealing with lot of bad loans), the immediate quarter almost always results in higher NPAs, as the new CEO wants to start on a clean slate and does not want any legacy problems from his/her predecessors work. This process is called ‘Kitchen Sinking’. Naturally, the results in the next quarter are much stronger and the new CEO boasts of the ‘ complete re-haul’ of operations which has resulted in this excellent results.

To be clear, Kitchen-Sinking cannot be termed as ‘immoral’ or ‘unethical’ by any means. You merely account for all the contingent negatives on immediate basis. The practice as whole is obviously debatable.

Is it possible that the Government also indulged in Kitchen-Sinking of GDP numbers for Q1 Fiscal 2021 ? Anyways, the Ministry of Statistics & Programme Implementation had sighted the lack of data availability and the numbers announced were basis ‘best available data’

In view of the global COVID-19 pandemic and consequent nationwide lockdown measures implemented since March, 2020; the data flow from the economic entities has been impacted. As some of these units are yet to resume operations and owing to the fact that the statutory time-lines for submitting the requisite financial returns have been extended by the Government, these Estimates are based on the available data. Consequently, the Estimates (Quarterly as well as Annual) are likely to undergo revision.

Ministry of Statistics & Programme Implementation, Q4 Fiscal 2020 data release

At a time, when media is covering the press conferences of WHO more than IMF & World Bank, the Government may have seen a window to start from a clean slate. In the times we live in today, even a 30% drop in GDP numbers would not have mattered to the broader narrative about economy and current ruling Government. Once discussions around economy takes front seat over the pandemic in the prime-time media debates, the GDP numbers will become very crucial. When that happens, India will most likely emerge as the fastest recovering major economy in Post Covid-19 World. Its all about the base! The 24% drop in numbers has ensured that even a gradual recovery in economy will look like a ‘strong recovery’.

Let us look at how the global economies have performed during Q1 Fiscal 2021 which most of us have come across on media

GDP Trend in Q1 Fiscal 2021 for world’s major economies

Source: Media Report

India has therefore seen the sharpest fall by a substantial margin during the period. The fall was primarily on account of fall in private consumption expenditure. The high Government spends was the savior of sorts for GDP

Source: Ministry of Statistics & Programme Implementation

The drop in private consumption and capex in India Inc majorly impacted the country’s GDP during Q1 Fiscal 2021. The increase in Government spends by 21% on-year provided support against a further fall.

The Road Ahead cannot be worse than Q1 Fiscal 2021

The high frequency indicators in the economy suggest some recovery in the economy.

• The Purchasing Manager’s Index (PMI) for manufacturing during August 2020 was recorded at 52 suggesting expansion in manufacturing activity. The PMI was below 50 during April 2020 – July 2020
• The domestic car sales of Maruti Suzuki and Hyundai Motors recorded more than 20% growth in August 2020 on-year basis (compared to August 2019).
• The tractor sales for Mahindra & Mahindra increased by a whooping 65% on-year basis in August 2020.
• Further, the drop in power consumption narrowed down to merely 0.85% on-year basis during the month.

The GDP will likely see a recovery on sequential basis given the low base

Let us assume a 6-7% sequential recovery in the quarters going forward and check the GDP growth/decline trend. During such volatile times when even global banks are downgrading the GDP numbers on regular basis, I hope the readers give us the liberty to play around with the numbers.

Source: Ministry of Statistics & Programme Implementation, Independent Estimates (Q2 Fiscal 2021 onwards)

Despite the sequential recovery, the GDP decline for India will continue to remain in high double digits, though it will continuously narrow down from Q2 Fiscal 2021 onwards due to the recovery. However, despite the high double digit decline the narrative will be that of a ‘recovering economy’ aided ofcourse by the massive -23.9% drop number which will form as a benchmark.

However, the benefits of low base of Q1 fiscal 2021 will play out from Q1 fiscal 2022 when the economic activity will hopefully be converging to pre-Covid levels

Source: In-House Estimates

We have assumed a 2% sequential recovery during Q1 and Q2 fiscal 2022 onwards and 3% for the next two quarters. Basis this assumption, the GDP for India will increase a whopping ~16% in Fiscal 2022. This should be more than enough for India to again regain its tag of ‘Fastest Growing Major Economy.’

Please note that despite the assumed sequential expansion in GDP, the numbers for Fiscal 2022 are still ~6% lower than fiscal 2020. This means that the size of economy by March 2022 may be smaller than March 2020 if the growth isn’t higher than above estimates.

Statistically, the Growth Story will only be Onwards & Upwards from Q2 Fiscal 2021

In a Post Covid-world, the Fiscal 2020 numbers may be history, as many economies and businesses re-align their operations. In such a scenario, India may likely emerge as the fastest recovering economy in fiscal 2022. Yet the capital markets may not celebrate it as the growth numbers will not have much significance due to the low base. But the Government and Finance Ministry would be successful in building a narrative around ‘successful turnaround of Economy‘ post Covid-19. To be fair to the Government as well, perceptions go a long way in financial markets for a company, Industry or an Economy. Time will tell, how India’s economic recovery is perceived globally especially by debt market participants. Enjoy the Show!