The Indian economy expanded by 1.6% in the three months ended March 31, the fastest in a year, to end 2020-21 with an overall decline of 7.3%. This compares well with the 8% contraction of the year projected by the National Statistics Office.
Much of the damage the economy suffered in 2020-21 was wrought in the first two quarters of the financial year. In Q1, the three months between March 1, 2020 and June 30, 2020, the economy contracted by 24.4%, the direct impact of a 68-day nationwide hard lockdown between March 25 and May 31. The federal government imposed this to slow the spread of the coronavirus disease, and strengthen health care and medical infrastructure to cope with the surge that, even then, was evident would follow. Even after May 31, restrictions on movement and activities were eased in phases, and returned to pre-pandemic levels only in the last quarter of the financial year (January-March).
Also read: GDP shrinks 7.3% in FY21; Q4 growth 1.6%
In Q2, July 1, 2020 to September 30, 2020, the economy contracted by 7.4%, the result of continuing restrictions. In Q3, October 1, 2020 to December 31, 2020, GDP growth crossed over into positive territory and the economy expanded by 0.5%. Both the second and the third quarters saw pent-up buying – most people bought nothing but basics in the first quarter – and also benefited from the annual festive season (the period between September and December that sees sales of most consumer products increasing), although last year’s wasn’t as strong as such seasons usually are. The economy was expected to contract in the fourth quarter of the year, with the end of the festive season and the burning out of pent-up demand, but government spending and construction activity seem to have helped it grow in the fourth quarter too. Both the quarterly and the annual numbers bode well, although low private consumption numbers in the former are cause for concern, and there are two interesting things about the latest GDP number (the one for the three months ended March 31).
One, it marks a turning point of sorts because the current quarter, as well as the three that follow, will see a beneficial base effect. Celebrations that can be expected to follow these numbers over the course of the year would do well to bear this in mind. For instance, the index of eight core industries for April was 126.7, which marks a 56% year-on-year jump over the previous year. But it was 149.2 in March, which means the index has actually declined 15.1% (which leads to…)
Also read: SC questions govt on its Covid-19 vaccination policy
…Two, given that the second wave emerged in mid-February, and likely peaked in early May, resulting in lockdowns through the second half of April, all of May, and, which may continue, at least in some parts of India, through the first half of June, the first quarter of the current financial year, 2021-22, is definitely not playing out to script. The Reserve Bank of India expects GDP growth to clock in at 10.5% for the entire year, which translates into 26.2% growth in the first quarter, 8.3% in the second, 5.4% in the third, and 6.2% in the fourth. It is now clear that the economy will definitely not grow by 26.2% in the first quarter (all high-frequency indicators point to this). It is also becoming clear that the effects of the bruising second wave of the pandemic, which is just beginning to ebb, will linger, perhaps well into the second quarter. And finally, even if vaccinations were to be accelerated to the 7.75 million shots a day that vaccinating everyone over the age of 18 years between now and December 31 entails – the government repeated this commitment in the Supreme Court on Monday – normal business will not resume before the beginning of the third quarter (October), and even that is an optimistic estimate.
Interestingly, most economists, while cutting their estimates for 2021-22, still expect the Indian economy to expand at a low double-digit rate. The median of 11 estimates compiled by Bloomberg News came in at 10%, just marginally down from the 10.5% before the second wave. The economists argue that this is because of two reasons: one, the lockdowns this year were state-level ones that ensured manufacturing activities were not overly affected; two, the cost of the second wave is more human than economic.
I disagree, and am not convinced the economy will expand by 10% without some serious intervention by the State.