By Indranil Pan
After a stellar Q1FY22 GDP at 20.1% year-on-year, Q2FY22 GDP for India at 8.4% is surely a great number to look at—especially when India emerges as the fastest growing economy in the Covid-19-induced new normal. The markets have been joyous of the fact that, in Q2FY22, the absolute real GDP of Rs 3,573 billion is larger than the absolute real GDP reported for Q2FY20, at Rs 3,561 billion. But for the first half of FY22, the absolute real GDP is still lower than in the first half of FY21.
No doubt, gradually and surely, India is managing to crawl out of the Covid-19-related slowdown. But even as the headline remains robust, a recent RBI study highlights that the negative output gap is still significant, implying the economy is yet to fire all cylinders. Importantly, the critical understanding needs to be on whether Covid-19 has inflicted a durable damage to the economy and what could be the measures that need to be employed to mitigate or at least reduce its impact.
On one hand, the organised production sector is back on its feet with profits largely in the black. Business confidence surveys conducted by RBI tend to indicate that the mood is relatively buoyant. Conditions for a pick-up in private investments are also clearly in place as most companies chose to deleverage and hence their balance sheets look healthy. Continuing negative real interest rates as well as government’s Production Linked Incentive (PLI) scheme are likely enablers.
The gross fixed capital formation (GFCF) as a proportion of GDP at constant prices has risen to 32.0 against the previous quarter’s 31.6. On an absolute basis, real GFCF was reported at Rs 1,142 billion, higher than the Rs 1,126 billion of Q2FY20. But it is largely estimated that most of this capital build-out is due to government expenditure, rather than private expenditure. With capacity utilisation levels continuing to remain low, manufactures (beyond a few sectors) would not be immediately keen to build up more capacity.
The crucial element for the economy going forward, therefore, would be to understand how the consumption drivers are shaping up. The private final consumption expenditure (PFCE) remains the most crucial contributor to the economy with its 50%-plus share in GDP. PFCE is yet to recover back to the pre-Covid-19 phase, even as it shows a 9% quarter-on-quarter growth in Q2FY22. This is even true for the government final consumption expenditure (GFCE), and this has degrown by 14% quarter-on-quarter in Q2FY22. Cumulatively, PFCE and GFCE in the first half of FY22 continue to be lower than in the first half in FY20.
Let’s now focus on another area—generally not an area of focus as economists discuss GDP—i.e. ‘valuables’. We note that this item has jumped by 603% quarter-on-quarter in Q2FY22 and is also up by 183% compared to the same quarter last year. As a proportion of GDP, ‘valuables’ in Q2FY22 was at 3.3% in real terms, up from a meagre 0.5% in the previous quarter.
What exactly are these valuables? These are expensive durable goods that do not deteriorate over time and are not used in consumption or even production and are acquired primarily as a store of value. Examples are works of art, precious stones and metals, etc. This indicates that the excess savings that had probably been piled up by the upper strata of the society during Covid-19 is now being spent for these purposes.
The above argument clearly indicates that growth remains inequitable; the upper income strata are spending while the lowest levels of income strata are not being able to. With consumption expenditure a function of one’s income, this indicates that incomes have still failed to recover to the pre-Covid-19 era, even as unemployment rate has come down to near pre-Covid-19 phase. Given this stress, the government has continued to provide free foodgrains and the scheme that was to end in November 2021 has now been extended to end-March 2022.
The rural sector remains under stress, even as agriculture production has been robust. There continues to be a large gap between employment provided and work demanded under the rural employment guarantee scheme—implying that a large segment of the labour force may not have yet returned to urban jobs and the rural workforce has not been able to find jobs outside of MGNREGA. This is a reason why the government has allocated additional Rs 250 billion for MGNREGA under the 2nd supplementary grant that was tabled in Parliament. Rural wage growth has been poor, especially for non-agricultural jobs. This had increased by 2.7% in August 2021 on a nominal basis, a negative number when inflation is netted out.
In conclusion, even as headline growth numbers appear robust, a deep dive into the numbers shows some fault lines. This is very important for policy-making. The government would have to continue to support the economy with its redistributive policies and this may have some implications for its capital spend. Further, with RBI assessing the negative output gap as large, the accommodative monetary policy will also continue, even at the risk of allowing for a slightly higher inflation level in the economy.
The author is Chief economist, YES Bank Ltd. Views are personal