Friday, Oct 07, 2022

With better than expected second-quarter numbers, economy could spring a positive surprise

The third and fourth quarter numbers are likely to spring a positive surprise, though conditional on the absence of another wave of infections.

The narrative has changed for the better since the first quarter (financial year) when India’s GDP growth declined by 23.9 per cent, and the fall for the full year was expected to be double digits. (Representational image)

The GDP data released on November 27 takes us back 50 years when economist and Nobel Laureate Paul Samuelson, on being asked on a television panel about his changing views on inflation, observed, “well when events change, I change my mind. What do you do?” India’s GDP data, or for that matter the GDP numbers released globally, lead to a similar predicament. Until now, GDP data for the third quarter of the calendar year 2020 has been released for 49 countries, 44 of whom have contracted in the range of 0-10 per cent. The narrative has changed for the better since the first quarter (financial year) when India’s GDP growth declined by 23.9 per cent, and the fall for the full year was expected to be double digits.

So what does the data show? The most remarkable part is the nominal GDP loss narrowing down to Rs 1.98 lakh crore in the second quarter of the financial year from a staggering Rs 11.1 lakh crore in the first quarter (the cumulative loss at Rs 13.1 lakh crore is equivalent to 6.4 per cent of 2019-20 GDP). Manufacturing (and construction) has minimised its losses by 91 per cent from the first quarter. The services sector has reduced its losses by 43 per cent, while the losses incurred by the trade sub-segment have fallen by a staggering 80 per cent. However, the losses of the financial, real estate and professional services and the public administration segments have jumped by 50 per cent. The recovery has been led by manufacturing and also by the largest component of the services sector — trade, hotels, transport and communication. The other good news is that the agriculture sector has already added 0.4 per cent to GDP in both the quarters.

If this trend of loss minimisation continues (at this rate, possible gains in nominal GDP in the third and fourth quarter are a distinct possibility) India’s 2020-21 nominal GDP will surprisingly not be lower than 2018-19 levels as was earlier expected. This would mean India has weathered the COVID storm in terms of a loss of output in 2020-21 that could be more than salvaged in 2021-22, though this is contingent on India getting back to business through continued sector-specific reforms.

Editorial | Economy outpaced expectations in second quarter. But sustainability of rebound in activities remains a concern 

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One worrying data point is the large discrepancies in the second quarter numbers which amount to 1.7 per cent of GDP. Over the last few years, as the economy has undergone many structural changes, data revisions in GDP and discrepancies have moved in the same direction (upward revisions in both), specifically in 2016-17 and 2017-18. In 2018-19, even as GDP was revised upwards, discrepancies were revised downwards indicating the process of reconciliation is getting better. But this job will become difficult in 2020-21 as even CSO believes that the data will undergo changes.

What are the possible reasons for the surge in manufacturing gross value added (GVA)? We believe one possible explanation could be the stellar corporate GVA numbers in the second quarter on the back of a massive purge in costs (a recent RBI study also confirms that), particularly on employees. The downside to such cost-cutting could be significant labour market disruptions, increasing inequality and thus a material impact on consumption. The good thing is that COVID-19 has brought about rapid changes in many industries in terms of innovations that will surely outlive the pandemic. For example, the pandemic has accelerated the pace of technology adoption in the banking system in India, with branch footfalls dropping sharply. One notable example of such technology adoption is the credit guarantee scheme for MSMEs that has been a resounding success, with almost all parts of the country benefitting from the scheme. Data consumption in rural India on the network of common service centres, and special purpose vehicles (physical facilities for delivering government of India e-services to rural and remote locations) also jumped by nearly 100 per cent during the lockdown. The thrust on digital financial literacy can now help in rapidly onboarding the digitally-unbanked rural population.

The disruptions in the labour market, however, could be a risk for future consumption and inequality. There have been more aggressive cuts in employee costs in the case of small companies with a turnover of up to Rs 500 crore. This is also substantiated by the results of NCAER’s Business Expectations Survey that shows that firms were more likely to terminate the employment of temporary workers, compared to that of permanent workers, owing to the skill premium of the latter.


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This raises clear concerns regarding inequality. Globally, data provided by the OECD on inequality shows that between 1985 and 2013 (the latest available data), the Gini coefficient rose significantly for most high-income countries with the US and UK being amongst the most unequal. The data for India, though quite dated and sporadic, indicates that inequality has increased but not significantly worsened. It is of utmost importance that we continue to reduce inequality through income support or transfers.

It is interesting to see how the incremental capital-output ratio (ICOR) will play out in 2020-21. The ICOR is the amount of capital required to produce one unit of output. The higher the ICOR, the less efficient the use of capital. Delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR. The ICOR in India has increased from 3.8 in 2016-17 to 4.9 in 2018-19 and is expected to further deteriorate to 6.9 in 2019-20.


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It would be unfair if we don’t talk about the huge role that the RBI had played in this context of arresting the growth slowdown. With government consumption expenditure declining sharply by 18 per cent in the second quarter, it now seems that monetary policy has played the perfect foil even as fiscal policy continues to remain tight-fisted. The RBI has donned many hats and fulfilled many expectations during the crisis. Beginning with a comprehensive solution for providing a liquidity backstop to convincing markets that liquidity problems will not translate into solvency problems and issues of financial stability, to giving explicit forward guidance of rates for an extended period to assuaging battered market sentiments when uncertainty was high and adopting out of box unconventional policies — its proactive approach has been a learning experience for all of us

So, what next? We now expect the GDP decline for the full year to be in single digits, and possibly even lower than the RBI and markets’ forecasts. The third and fourth quarter numbers are likely to spring a positive surprise, though conditional on the absence of another wave of infections.

This article first appeared in the print edition on November 30, 2020 under the title ‘Onwards and upwards’. The writer is group chief economic advisor, State Bank of India. Views are personal

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First published on: 30-11-2020 at 03:30:33 am
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