Friday, Sep 30, 2022

Glimmer & tunnel

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

In part, the continuing healthy performance of the farm sector helped ease the extent of contraction of the economy.

After an unprecedented decline of 23.9 per cent in the first quarter of the current financial year, the Indian economy fared better than most expected, with the pace of contraction easing to 7.5 per cent in the second quarter. The performance, better than what economists at the RBI had predicted, reflects in part, a steady improvement in activity levels with the easing of lockdown restrictions during this period, and the ramping up of production to satiate the pent-up and festival season-led demand. In the weeks thereafter, the continuing sequential improvement in leading economic indicators has led to optimism that the economy is likely to rebound stronger than expected in the second half of the year. However, one must advice caution, as the durability of the sharper-than-expected rebound remains a matter of concern.

In part, the continuing healthy performance of the farm sector helped ease the extent of contraction of the economy. Excluding agriculture, value added by rest of the economy contracted by 8.3 per cent in the second quarter. The manufacturing sector grew by 0.6 per cent in the second quarter, after contracting by a staggering 39.3 per cent in the previous one. While volume indicators like the index of industrial production continued to contract during this period, even though the extent of contraction had eased greatly, presumably, value added by the sector has risen on the back of aggressive expenditure pruning as indicated by corporate results. Similarly, the construction sector witnessed a significant uptick with the contraction in activities easing to 8.6 per cent in the second quarter, down from 50.3 per cent in the first quarter. This despite construction activities being muted during the monsoon season. On the services side, while a similar improvement was observed in the trade, hotels, transport and communication sector, surprisingly, the pace of contraction actually worsened in financial, real estate and professional services sector during this period. While private consumption fared better, as household spending perked up with restrictions on economic activities and movements gradually lifted, government spending rather than being counter-cyclical, continued to be pro-cyclical, falling in the second quarter as well, despite the announcement of massive relief packages. Investment activity also improved during this period, presumably on account of work beginning on projects that had been stalled due to the lockdown restrictions, as did the change in stocks, indicating higher inventory accumulation.

The stronger than expected uptick in economic indicators in October, while raise optimism over the state of the economy, must be treated with caution as data for some of these indicators for November signals some moderation in activities, justifying concerns over the sustainability of this upswing. Further, the possibility of the imposition of localised restrictions on activities due to rising COVID-19 cases adversely impacting economic activities going forward also cannot be ruled out.

Subscriber Only Stories
Shashi Tharoor: ‘I don’t think everyone who voted BJP in 2014...Premium
Ahead of Centre’s ban, chorus from Sangh, affiliatesPremium
Volatile INR still relatively stable; what now?Premium
Hindu-Muslim violence in the UK: Revisiting LeicesterPremium

First published on: 30-11-2020 at 03:49:01 am
Next Story

Maharashtra: Former BJP minister in spot for threatening policeman

Latest Comment
Post Comment
Read Comments