InvestorQ : What is your view on the third quarter GDP announced by the government?
Arti Chavan made post

What is your view on the third quarter GDP announced by the government?

Rutuja Nigam answered.
2 months ago

The Dec-21 quarter GDP was anyways expected to be lower compared to the fairly elevated levels of 20.3% in Jan-21 quarter and 8.5% in the Sep-21 quarter. In comparison, the real GDP growth for Dec-21 quarter came in at a much more subdued 5.4%. However, it looks like the jinx of COVID is broken finally as the 2 year growth in GDP was a robust 6.2%. The Dec-21 figure should have been better, but for the Omicron side effect.

However, economists got it awfully wrong. It is said that if you put all the economists in the world one after the other, they still would not reach a conclusion. In a Reuters survey, economists had projected Q3 GDP growing 6.3% in their first estimate but the figure was later scaled down sharply to 6%. However, actual GDP growth for the third quarter came in another 60 basis point slower at 5.4%. Pandemic effects can be hard to project.

Let me share with you an interesting insight. Did you know that inflation played a big part in depressing real GDP growth in the quarter. Real GDP growth is nominal GDP adjusted for inflation. So, higher the inflation, lower is the real GDP growth and vice versa as it works both ways. This is called GDP deflator; a pompous word but that is what it means. But how did inflation really have a negative impact on the real GDP of India.

Let us look at some numbers and for better clarity, let us look at 2 year numbers i.e. Dec-21 quarter over Dec-19 quarter. If you consider a 2 year period then real GDP is up 6.2% but nominal GDP is up 22.9%? Wow, that is a huge difference. The last 2 years have seen sharply higher inflation in CPI and WPI terms. The inflation impact has been so severe in last 2 years that 22.9% nominal GDP growth literally fell vertically to just about 6.2% real GDP growth.

What does this say about Q4 GDP? There are several imponderables at this point of time. Firstly, crude is at $118/bbl and showing absolutely no signs of relenting. Secondly, Russia Ukraine war is getting from bad to worse and promising a lot of supply chain bottlenecks. Thirdly, higher inflation has been partially factored, but the cost of Fed hawkishness is still uncertain. If Q3 was uncertain, Q4 GDP will post the real big conundrum for India.