Recently released Q2 2021 GDP data showed that the Indian economy grew by a remarkable 20.1% YOY. However, seen on a quarter-on-quarter basis, economic activity took a hit due to the massive second wave of COVID-19 in India between April and June 2021.

Our View

Unsurprisingly, India’s large second wave disrupted the service sector and consumer spending activity the most. However, the fall in investment surprised to the downside, as government restrictions were not aimed at investment activity, and public capital expenditure was expected to bolster total investment levels. External trade was the only component of GDP that grew in Q2, as export demand surged amid weak local demand. Divided by sector, the steep sequential contraction in transport and tourism was expected due to the contact-intensive nature of these sectors. However, the sharp fall in public administration services during a time of economic crisis surprised to the downside. As the latest aggregate data is roughly in line with our expectations, we are maintaining our annual GDP forecast at 7% YOY for FY 2021–2022 (April 2021–March 2022). Firms should note that sustained weakness in investment and government spending could reduce our medium-term expectations.

Business Implications

Barring very large additional outbreaks of COVID-19, firms should expect a robust recovery of the Indian economy through the rest of 2021 due to the upcoming festive season and pent-up demand from Q2. Beyond 2021, B2B companies should capitalize on the government’s focus on capital expenditure, while tracking actual expenditure against targets and rhetoric. B2C companies should expect K-shaped buying behavior to continue into 2022, i.e., spending recovery from higher-income segments will be faster than from lower-income segments.

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