Updated: December 2, 2021 10:21:34 am
At 8.4 per cent, GDP growth in the second quarter this fiscal, read along with high-frequency indicators, point to a faster-than-anticipated recovery amid rising commodity prices and supply-side bottlenecks. And higher retail and wholesale inflation meant nominal GDP rose 17.5 per cent in the second quarter. This is also borne out by data from CRISIL Ratings — upgrades outpaced downgrades 2.26 times in April-September.
While the GDP data was not unexpected, it’s interesting to see what the drivers and drags are. Sector-wise, the swift pace of vaccination and low viral caseload triggered a gradual broad-basing of economic activity in the second quarter, with the gradual opening of the services sector. Though over a very low base, this pick-up in services has offset some of the weakness that has crept into manufacturing owing to supply-chain bottlenecks, notably in the automobile and electronics sectors. Agriculture, which accounts for about 15 per cent of the GDP, grew 4.5 per cent on-year in the second quarter, maintaining its stellar run through the pandemic.
Received wisdom is that a third wave, if it plays out, is unlikely to be as lethal for healthcare or the economy as the first or second because of significant vaccine coverage. More vaccinations and learning to live with the virus will also lead to progressively less-stringent lockdowns. As things stand, we maintain our GDP growth outlook at 9.5 per cent for this fiscal. But we expect a deceleration in the second half to 6.2 per cent from 13.7 per cent in the first as the low-base effect wanes.
One, growth in real government consumption has trailed GDP growth — it has contracted 14.2 per cent in the second quarter on-year. Central government revenue collection has been exceptional this fiscal, buoyed by strong GST mop-up and high taxes on petroleum products. By the end of the first half, the Centre had already collected 60 per cent of its targeted revenue for the full fiscal, but had spent only 47 per cent. The excess revenue is lying as cash balance with the Reserve Bank of India and can be deployed anytime to support the economy. Data from 16 major states, however, shows that both revenue and spending trailed versus the Centre’s performance.
Two, conditions are finally becoming favourable for the turn of the investment cycle, both public and private. The second-quarter data shows that investment momentum is picking up faster than consumption. Fixed investments as a percentage of GDP rose between the first and the second quarters of this fiscal, while private consumption fell.
The government has been focusing on reviving the investment cycle through high infrastructure spending and incentives to private investment, such as the PLI scheme. Central government investments, especially to build roads and highways, are broadly on track, while state investments are lagging. Private sector capex is also showing signs of stirring. Large corporates in sectors such as steel and cement have printed healthy capacity utilisation data. They have also deleveraged in the recent past, which has provided a buffer in uncertain times and improved their financial profiles. This primes them for fresh investments and re-leveraging as the investment cycle takes hold. Brownfield investments have begun kicking in. CRISIL estimates the PLI scheme could see Rs 2-2.5 lakh crore investments between fiscals 2022 and 2026, which would bolster overall capex. This fiscal, investments through the scheme have been to set up factories for pharmaceuticals, mobile phones and information technology hardware.
While the pre-conditions for an upturn in the private investment cycle are being met gradually, it is too early to call it broad-based. What is certain, though, is that the success of the PLI scheme and infrastructure plan will be crucial to driving private investments as well as the overall cycle. The private corporate sector, after having over-invested during the boom of 2003-08, and recovery post the global financial crisis, will take a calibrated approach.
On the other hand, private consumption, accounting for over 55 per cent of GDP, is showing a mixed run. It grew 8.6 per cent on-year in the second quarter but trailed the investment momentum. As a percent of GDP, it fell between the first and second quarters this fiscal. While demand for high-ticket items — such as cars and utility vehicles — remains strong and is expected to cross the pre-pandemic level this year, for two-wheelers and some white goods it remains relatively weak.
This consumption pattern broadly mirrors the widening income inequality spawned by the pandemic. It is also in line with the consumer confidence survey of the Reserve Bank of India published in October, which showed that despite improvement, consumer confidence continues to lag pre-pandemic levels.
Nevertheless, as the labour-intensive services sector picks up, urban incomes should increase. That, and the lowering of fuel inflation, could support private consumption in the third and fourth quarters this fiscal.
But the cascading of input costs to end-consumers and the spike in vegetable inflation are consumption-negative. An offset here would be additional spending through the National Rural Employment Guarantee Act, which can support rural consumption and be a cushion for the poor for whom the free supply of foodgrains — introduced during the pandemic — would end soon. Lastly, riding on high global growth, exports have provided extraordinary support from last fiscal. In both real and nominal terms, exports crossed the pre-pandemic levels last fiscal itself.
The trend will support growth in the second half of this fiscal as well, given that global GDP is seen at 5.8 per cent in 2021 by S&P Global. Trade in services, though lagging goods, should gain momentum if the global spread of Covid-19 remains restrained, and the Omicron variant does not wreak havoc.
Risks to growth are transitioning from pandemic-related to recovery-related, and many economies have begun pulling back the policy accommodation extended during in the recent past. The Omicron variant, by bringing pandemic-related risks to the fore, has reminded us that the virus is yet to be defeated. How it festers, or is quelled, and how policymakers react, or don’t, will determine how bumpy, or smooth, the ride from here will be.
This column first appeared in the print edition on December 2, 2021 under the title ‘Building the Indian century’. The writer is chief economist, CRISIL Ltd
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