In its report for February, the department of economic affairs said economic activities have gathered pace, with mild stiffening of the Covid-19 curve failing to deter a steady uptick in consumer sentiment that has been bolstered by the inoculation drive.
Nevertheless, it conceded that a “major downside risk to growth continues to be the pandemic-induced morbidity and fatality that has elevated health stimulus as a key macroeconomic lever for India’s continued economic recovery”.
The report said since GDP contraction has been distorted in FY21 on account of significant growth of subsidies, the change in GVA is a more appropriate measure to follow in the current fiscal.
Explaining the reason as to why the estimated 8% fall in real GDP is higher than that of 6.5% in real gross value added in FY21 (in the second advance estimate), the report said food and fertiliser subsidy from the budget estimate to the revised estimate of FY21 rose dramatically by `3.7 lakh crore. This was mainly due to the moving of certain below-the-line subsidy to above-the-line in view of the government’s decision to make the Budget numbers transparent.
“After making adjustments for pre-payment of loans of `2 lakh crore taken for paying subsidy of previous years, the balance `1.7 lakh crore emerged as the additional subsidy paid in the pandemic year. This enhancement between BE and RE caused the growth of subsidies to be significantly higher than the growth of indirect taxes. Consequently, GVA growth became higher or in other words GVA contraction became smaller than that of GDP,” the report said.
However, in the next fiscal, the annual subsidy growth estimated over the unusually large base of FY21, will again become lower than the growth of indirect taxes. So, real GDP growth will exceed real GVA growth in FY22. Against this backdrop, the change in GVA is a more appropriate measure than that in GDP to track this fiscal, it argued.
The report said rapid production and deployment of vaccination will be critical to taking forward the health stimulus deep into FY22. India is well in position to do so, having become the largest producer of vaccine in the world and currently ranked third (after the US and the UK) in administering vaccine doses, the report said.
The positive GDP growth (0.4%) in the third quarter of FY 21, for the first time since the onset of the Covid-19 pandemic, adds to the positive sentiment, it said.
The expansion of services activity since the beginning of 2021 is particularly noteworthy. “The pick-up in construction activity, with its wide array of backward and forward linkages, is slowly developing into a critical growth lever of the economy,” the report said.
Agriculture continues to show robust growth and is instrumental in strengthening rural demand along with MGNREGS that has created 350 crore person days of employment in 11 months of FY 21, 41.6% higher than a year before.
Aided by rising rural incomes and growing preference for private transport, growth in automobile sales is “reassuring of a demand resumption further strengthened by softening of inflation to a 16-month low of 4.1% in January 2021”. Strengthening of demand is further in evidence with imports growing between December 2020 and February 2021.