The Q1 GDP estimates for FY22 (Rs 51.23 trillion at current prices) have yielded two opposing views, depending on whether one tends to view a glass as half full or half empty.
One view is that the 20.1 percent growth (as compared to contraction of 24.4 percent in Q1 of FY21) shows strong economic recovery, and the other points out that the GDP value is still below what it was before the pandemic (Q1 of FY20). Both views are correct because the latest quarter coincided with the second wave of the COVID-19 pandemic but the state-wise lockdowns were less severe than the lockdowns imposed in 2020. The result was a slowdown in economic activity compared with Q4 of FY21, but better than during the first wave.
The simple fact is that economic activity has now become strongly correlated with the intensity of the pandemic and consequent government restrictions. The economy is performing as well as the COVID-19 situation permits. However, when we dig beyond the headline GDP number, we can find some pointers for government policy and the road ahead.
Composition Of GDP
There are two ways in which the National Statistics Office compiles the quarterly GDP. One is by adding up the sources of spending, and the other is the sum of value added by various sectors. On the spending front, while there have been concerns raised about slowdown of private consumption, as a share of GDP this item has been steady at a little over 55 percent. The good news is that private investment as a share of GDP has shot up from 24.4 percent (in Q1 of FY21) to 31.6 percent which is close to pre-pandemic levels. Clearly, the stock markets are on to something. Private investments could be picking up in line with rising net profits of large companies and in anticipation of festival demand.
Exports and imports have also increased as a percent of GDP compared to last year. While exports were helped by recovery in destination countries, the rise in imports is a good sign as it suggests restoration of purchasing power among the domestic buyers, including companies and government.
The weakness in the GDP story is very clearly government spending whose share has come down from 16.4 percent to 13 percent. Even though it is still higher than pre-pandemic levels, withdrawal of the kind of support we saw last year (Aatmanirbhar package) has hurt the economy. Had the government continued spending like it did during the first wave (on cash transfers, free food, NREGA), the GDP may have reached the pre-pandemic level, owing to the direct and multiplier effects of revenue spending.
Moving to output composition of the GDP, manufacturing and construction have made strong comebacks clocking 50 percent and 68 percent growth over Q1 of FY21. While the low base argument applies here too, what is heartening is that the rebound is visible across sectors from agriculture to services, including the much-impaired trade, hotels, transport and communication segment that grew by 34.3 percent.
What To Expect
There are some caveats to the above numbers. Many displaced workers have returned to the unorganised sector. The quarterly GDP estimates for the large unorganised sector as well as sectors such as agriculture, forestry, gas, water, kutcha construction, etc. are based on forecasts generated from trends of the past years. This means that the quarterly GDP estimates have significant scope of revision as better data becomes available by the year end. There is a good chance that 2021-22 may see double digit growth making India the fastest growing major economy once again, particularly if the vaccination pace continues, and the next waves are mild.
The uncertainty in economic activity will continue due to reasons such as global supply chain disruptions. There are reports of shortages in many inputs such as semiconductors and building material due to disruption in port activity related to cargo backlogs and intermittent lockdowns in various parts of the world. Then there is the uncertainty related to United States Fed taper and crude oil volatility.
Therefore, while growth is expected to pick up pace, the government must continue measures to stimulate demand through targeted cash transfers and improve business conditions on a continuous basis.
Rudra Sensarma is Professor of Economics, Indian Institute of Management Kozhikode. Twitter: @RudraSensarma.
Views are personal and do not represent the stand of this publication.
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