Shifting fortunes of Indian economy amid pandemic

By: |
June 09, 2021 8:23 AM

Lockdowns (prolonged or of short duration), one of the most tested instruments to fight the crisis, implies dislocation of economic activities which hits aggregate demand.

Economy, India statesUnlike the V-shaped recovery in 2020, we expect the economy to have only a gradual recovery this time, as consumer sentiment remains weak on pandemic-related uncertainties. (Representational image)

The pace of vaccination has suddenly become the single most important factor in assessing the country’s economic performance in Fy22. Lockdowns (prolonged or of short duration), one of the most tested instruments to fight the crisis, implies dislocation of economic activities which hits aggregate demand. From the expenditure angle, the loss of income brings down consumption and restrains demand. Lots have been written about the mega trends that would follow the current unprecedented crisis of the pandemic namely, digitisation, automation, smart manufacturing, healthcare related activities, e-commerce and retail business. However, the faster the victory against the virus is achieved via speedier process of vaccination, higher is the chance of jumping to the ladder for V-shaped, U-shaped or K-shaped recovery in the current year.

All the estimates made in January’21 have been brought down in April’21 and it is continuing in May-June’21. In the MPC resolution, RBI has cut down 10.5% GDP growth in FY22 (estimated earlier) to 9.5% which comprises of 18.5% growth in Q1, 7.9% in Q2, 7.2% in Q3 and ending Q4 with 6.6% growth. Already the Q1 growth has been brought down by RBI from 26% to 18.5%.

Positive elements in RBI estimates have been taken as rising rural demand, satisfactory monsoon impact and strong global push in the export sector. These factors in all likelihood may be sustained for the balance period of the current fiscal. However, the pace of vaccination and outcome of 2nd and 3rd wave of the virus are the two elements which have downward risks. The trend in Q2 would be keenly watched to evaluate the real impact for the whole year.

The official release of provisional GDP estimates for FY21 period highlights the areas that need special focus to realise the 9.5% growth in GDP in the current fiscal. The FY21 GDP is down by 7.3%, substantially lower than 4.0% growth achieved in FY20.

As regards investment, the GFCF at current prices have come down by Rs 5,01,438 crore which takes its share in GDP from 28.8% in FY20 to 27.1% in FY21. The government expenditure on healthcare facilities, distribution of food and other necessary goods for the Covid victims, direct transfer of funds to the farmers has gone up significantly this year. This is more reflected by comparing the higher incremental government final consumption expenditure (at current prices) worth of `1,82,399 crore in FY21 compared to FY19. In fact this component in some of the advanced countries in GDP is substantially higher in the context of their having to bear a much larger social welfare expenditure. In all likelihood this component in GDP would continue to grow in the current fiscal also.

The silver lining is provided by 1.6% GDP growth (albeit meagre) in Q4 of FY21. After December’20, things were looking up as regard the severity of the pandemic in the country before the emergence of the second wave in later part of March’21. It must be mentioned that the relieved scenario in first two months of Q1 of FY21 led to a spurt in public investment in roadways and in affordable housing segments.

The stiffer challenge therefore to lift up the sagging GDP growth relates to sustaining the public investment in infrastructure and construction. The aggregate demand needs a special boost by enhancing direct transfer as well as free ration to the marginal and migrant workers, farmers, BPL families.

It is essential to continue with budgetary announcement of public investment in roads, railways, affordable housing, transportation of water, gas and oil, ports, irrigation. The uncertainty prevailing in the economy on demand growth and rate of return on fresh investment must be taken care of by higher level of government intervention in infrastructure projects to incentivise private investment through implementation of PPP module in the form of HAM (Hybrid Annuity Method), BOT (Build, Operate and Transfer) and EPC (Engineering, Procurement and Construction).

—Views expressed are personal

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