The GDP outturn for July-September showed the economy grew 8.4 percent in the quarter on annual basis, and 10.4 percent over the preceding quarter. Against a deep contraction (-7.4 percent) last year, the quarter-on-quarter improvements in private consumer and business demand were a respective 9 percent and 12 percent, while government spending increased by10 percent with exports at 8.4 percent.
Private consumption and fixed assets creation added a respective 4.7 and 3.5 percentage points to GDP growth in the quarter, with net exports at -6.5 points. The supply side rebound was also broad-based on annual basis, with the quarter-on-quarter performance of some components, viz. trade, hotels, transport, communication, etc. and manufacturing standing out.
Encouraging as the data may be, it is superficial over the deep troughs of one year ago. Compared to the pre-pandemic levels, the overall growth catch-up is a bare 0.33 percent rise in correspondence. Assessments of post-pandemic economic performance have to be reserved at this point as not only did the COVID-19 second wave partially spill into the second quarter, but many services also remained restricted, un- or partially-opened. In particular, the comeback of the trade, transport, and hospitality sectors that are major employers of the informal, unskilled, and low-income population, and which largely remained without meaningful policy support through the pandemic, is yet to be fully observed — the segment was -9 percent below July-September 2019. A truer picture of economic recovery will have to await the current quarter’s performance.
Two features are noteworthy at this point, and what they augur for the future path of recovery. The first is the evolution of consumer demand. This reflects a continuation or rather, a worsening of the deterioration that had set in well before the pandemic. The robust quarterly rebound masks the extent of depression in consumer spending, which measured -3.5 percent below its level two years ago along with an eroding share in aggregate expenditure.
The second is inflation. The GDP deflator rose 9.1 percent year-on-year, and stood 11.8 percent higher over the September 2019 quarter. The price growth is an adverse portent for consumer demand, which it is likely to blunt. Incomes have not only fallen below previous levels but even the meagre spending capacities are being swept away by higher prices of goods and services.
Both have a bearing upon demand endurance once the distortions induced by the pandemic have worn off. One, the likelihood of consumption restoring to former strength is not assured at this point. Several indicators point to this; for example, the lagged official as well as contemporary private data on unemployment show this is still high, the depressed two-wheeler vehicle sales, and the feeble growth of fast-moving consumer goods in September quarter, among others.
Two, there’s reason to be apprehensive about what will propel growth — necessary for income improvements that majorly fire consumption that in turn, feeds into future investment. Government spending amounts are too small relative to the depth of demand decline for a meaningful impetus – in real terms, this is -17% over September 2019 quarter for instance; moreover, this has run its course with debt levels in excess of 90 percent of GDP and set to consolidate further on.
Three, the sudden developments about a new, seemingly potent mutation of the coronavirus (Omicron) are not a good augur for inflation, which could get aggravated by more containment restrictions. Four, the positive spark to demand from exports – 17 percent growth over the matching 2019 quarter — could be dented by another layer of uncertainty imposed by Omicron.
The weight upon consumption to uplift growth beyond the initial outburst after reopening is considerable in the light of these settings. Here, sustained export performance, which can impart a strong income effect to both consumption and investment, is of paramount importance in forthcoming months.
The just-released manufacturing PMI for November, which rose at its fastest pace in 10 months and 1.7 points over October to 57.6, is a mixed guide in the context - new export orders rose slightly at a weaker pace (quite similar across Asia) and domestic demand was the primary driver with intense cost pressures and decline in sentiments to a 17-month low.
Considering the fast rebound of manufacturing and exports in September quarter GDP outturn, the overall signs of weakening demand and a clouded outlook suggests keeping fingers crossed for a durable recovery ahead.
Renu Kohli is a New Delhi-based macroeconomist.
Views are personal and do not represent the stand of this publication.
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