The economy may have emerged from the woods, but challenges loom
After two quarters of a sharp contraction, India’s economy is estimated to have rebounded out of a ‘technical recession’ to record feeble growth in the October-December 2020 period, with GDP rising by 0.4% and GVA by 1%. The overall numbers are not surprising. Just as the short-notice pandemic lockdown and the subsequent case surge took the wind out of mobility and economic activity in the first half of the fiscal year, the ‘unlocking phase’ that was largely complete by late September, brought back a semblance of normalcy, with pent-up and festival demand spurring spending, and helping reboot production lines. Agriculture remained the resilient bulwark in the third quarter as well, with farm GVA rising by 3.9% after being the sole sector to clock growth in the preceding two quarters. Manufacturing and construction resurfaced from a collapse to expand 1.2% and 6%, respectively. Both these sectors had been under stress even before the pandemic, posting contractions starting from the second and third quarters of 2019-20. Despite the Centre’s push on government spending, public administration, defence and other services contracted 1.5% last quarter. However, investment demand is estimated to have rebounded, with fixed capital formation posting positive momentum after several quarters, driven perhaps by public spending. Most worryingly, retail, trade, hotels, transport and communication contracted by 7.7%.
Despite the Q3 uptick, the second advance estimates of national income for the year project an 8% contraction in the GDP, wider than the – 7.7% estimated in January. This may partly be due to the NSO revising the first quarter’s GDP shrinkage to 24.4%, from the 23.9% calculated earlier. The latest numbers also may be taken as an indicator at best, with the NSO stressing that the estimates are likely to undergo ‘sharp revisions’ as the pandemic affected data collection. Like the growth rate for 2019-20 was revised from 4.2% to 4% in January, the real GDP growth for the third quarter of the last fiscal has been scaled down to 3.3%, from 4.1%. The base effect may well have helped nudge India’s growth into positive territory, but it is an important psychological barrier to cross. Growth numbers alone may still not be capturing the tumult faced by swathes of informal and micro-enterprises, nor do they reflect a recovery in the job market. The continuing stress in employment- and contact-intensive services sectors is a worry, and the government must consider support measures. The second wave of infections in industrial hotspots such as Maharashtra, and the risk of infections rising in poll-bound States, do not bode well either for services or the fragile recovery in manufacturing. A smooth and expeditious roll-out of the vaccine, with the private sector drafted in to achieve scale, is an imperative to help India navigate the bumps ahead more deftly.