After recent stringent lockdowns, economy continues to normalise

Braving the recent stringent lockdowns, the economy continues to normalise. The Nomura India Business Resumption Index has risen to post-lockdown highs in successive weeks recording a  jump to 89.1 for the week ending 6 December from 81.5 at recorded in end-September.

On balance the GDP growth will improve to -0.8 per cent y-o-y in Q4 vs -7.5 per cent in Q3, with 2020 at -7.1 per cent y-o-y. Yet, the process of normalisation remains uneven and incomplete as shown by the Nomura India Normalisation Index (NINI) which is our proxy for measuring the extent of normalisation across sectors. While the consumption sector has largely normalised owing to a festive boost in auto sales in recent months, the momentum is flattening for the industry, investment and external sectors with levels ~10pp below the pre-pandemic normal.

Owing to its contact intensive nature, services continue to lag considerably behind (40pp below pre-pandemic levels). For 2021, we expect a slower sequential pace in H1, followed by a faster recovery in H2 (although y-o-y growth will likely fluctuate due to base effects). We project GDP growth to remain in negative territory in Q1 2021 (-1.2 per cent), pick up to 32.4 per cent in Q2 on base effects, before easing to 10.2 per cent in Q3 and 4.6 per cent in Q4. Overall, we expect GDP growth to average 9.9 per cent in 2021 vs -7.1 per cent in 2020 and 11.9 per cent in FY22 (year ending March 2022) vs -8.2 per cent in FY21.

In H1, there is a risk of a slowdown in sequential momentum owing to: 1) a rise in infection cases due to crowding during recent festivals (e.g., already some states have re-imposed restrictions which could weaken consumer demand; 2) fading of pent-up demand after the initial reflex; 3) fiscal drag from expenditure compression in Q1, as the government struggles to keep the deficit under control; and 4) weaker growth in Europe and the US due to the pandemic. However, despite the growth hiccups, we believe India is at the cusp of a cyclical recovery. We expect the cycle to gain further traction through the year supported by: 1) lagged effects of easy financial conditions; 2) a synchronised global recovery and 3) a vaccine pivot.