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Tuesday, September 28, 2021

With private consumption and investment still subdued, exports could provide fillip to growth

In the weeks and months thereafter, with the second wave waning and lockdown restrictions being eased, high frequency indicators suggest a strong uptick in momentum.

By: Editorial |
Updated: September 1, 2021 9:29:45 am
The sectoral breakup of the GDP data shows that despite concerns over the dramatic spread of the virus in rural areas, agriculture has continued to hold up.

The economy grew by 20.1 per cent in the first quarter (April-June) of the current financial year — a period when the country was in the throes of the horrific second wave of the pandemic. In normal times, these year-on-year comparisons provide a fair understanding of the state of the economy. But the first quarter numbers suffer from a statistical distortion — a low base effect. The economy had contracted by 24.4 per cent in the first quarter of the previous financial year (2020-21) when a national lockdown was imposed to deal with the spread of the virus. Notwithstanding this, these numbers suggest that even though the second wave of the pandemic was more virulent than the first, the localised restrictions imposed during this period seem to have had a less deleterious effect on economic activity. And that even after growing at 20.1 per cent, GDP in the first quarter of the current year is around 9 per cent lower than what it was in the first quarter of 2019-20. Considering that the economy had reached pre-Covid levels in the second half of last year, this reflects the loss on account of the second wave of the pandemic.

The sectoral breakup of the GDP data shows that despite concerns over the dramatic spread of the virus in rural areas, agriculture has continued to hold up. In fact, of all the sectors in the economy, only value added by agriculture and electricity, gas and water supply, is higher than their pre-Covid levels. Manufacturing and construction — both sectors had contracted sharply last year — bounced back, but value added by these sectors has still not reached 2019-20 levels. In the labour intensive trade, hotel, transport and communications sector, the gap is even larger. On the expenditure side, even as private consumption and gross fixed capital formation, which connotes investment activity in the economy, exhibited high growth rates, they remained well below their 2019-20 levels. Only exports surpassed the 2019-20 levels.

In the weeks and months thereafter, with the second wave waning and lockdown restrictions being eased, high frequency indicators suggest a strong uptick in momentum. The Nomura India Business Resumption Index rose to 102.7 for the week ending August 29, up from 60.2 in May — indicating a return to pre-pandemic levels. But there is cause for concern. For one, the quarterly GDP data does not accurately capture trends in the informal economy. As such, it is difficult to know the extent of its recovery from the depths of May. This, and how MSMEs are faring, will have a bearing on employment prospects. Second, with household demand subdued, and capacity utilisation rates low, private investment is likely to remain muted. The ability of government spending to drive growth is also constrained at this juncture. Exports, though, could provide the much needed fillip to growth. Third, even as the pace of vaccination has picked up, there continues to be uncertainty over the prospects of a third wave.

This editorial first appeared in the print edition on September 1, 2021 under the title ‘Terms of recovery’.

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