The Indian economy contracted by 7.3% in the fiscal year 2020-21, according to the GDP statistics released by the National Statistical Office on May 31, the worst ever economic performance on record, but still better than expectations. The NSO put this number at 8% in its last release in February.
The latest GDP numbers and provisional fiscal numbers suggest that the 2021-22 Budget presented on February 1 was conservative in its projections of the 2020-21 economic performance. Both the level of nominal GDP and Gross Tax Revenue are higher than what was projected in the Budget. The gross fiscal deficit of the government in 2020-21, as per the provisional estimates released by the Controller General of Accounts, is ₹18.21 lakh crore compared to the ₹18.48 lakh crore according to the revised estimates given in this year’s Budget. Which means it is 9.3% of GDP, not the expected 9.5%.
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This relative improvement in 2020-21 GDP estimates is due to a better performance in the last quarter (January-March) of 2020-21 which saw GDP growth increase to 1.6%. GDP contracted by 24.4% and 7.4% in the first and second quarters of 2020-21, and grew by 0.5% in the third quarter.
A fiscal push on capital spending and some green shoots in private spending seem to have played an important role in the faster than expected recovery in the quarter ending March 2021. To be sure, NSO has underlined the possibility of “implications on subsequent revision of these (GDP) estimates” as “the statutory timelines for filing the requisite financial returns of fourth quarter have been extended” due to the eruption of the second Covid-19 infections.
That’s the good news.
The bad news is that the second wave of Covid-19 infections might have led to a backsliding of the recovery seen in the March quarter. The index of eight core sector industries in the month of April 2021 fell to 126.7, the lowest since the 127.7 value of November 2020. This number was 149.2 in March. The Nomura India Business Resumption Index (NIBRI), which was 99.3 in the week ending February 21, fell to 60 by the week ending May 23. Large parts of the country are still under partial lockdown. Experts believe that the second wave of Covid-19 infections might have derailed the economic recovery seen in the quarter ending March and that the GDP numbers do not yet reflect the pain in the informal sector. A Bloomberg poll of economists has projected the median GDP growth for 2021-22 at 10%. RBI, in its Annual Report released on May 28, projected a GDP growth of 10.5% for the current fiscal year.
An analysis of the Gross Value Added (GVA) data by sectors for the quarter ending March shows that construction (14.5%) and manufacturing (6.9%) saw the biggest sequential improvement in growth. The labour-intensive service sectors of trade, hotels, transport, communication and broadcasting services remained in contraction zone (2.3%) despite a significant improvement in mobility levels in the quarter. Agriculture grew at 3.1%, a moderation compared to the 4.5% growth seen in the quarter ending December 2020. Private final consumption expenditure came out of the contraction zone for the first time in 2020-21 in the quarter ending March 2021 with a growth of 2.7%. Government final consumption expenditure jumped by massive 28.3%. Gross Fixed Capital Formation, which measures investment , grew by 10.9%.
“The better-than-expected growth print partly owes it to healthy corporate results in March quarter of FY21. We admit the situation is still in a flux, and it is too nascent to gauge the true impact of the second wave on macro variables. We believe that the impact is unlikely to be of the same magnitude as last year,” said Madhavi Arora, lead economist, Emkay Global Financial Services. But the numbers may have been overtaken by the second wave.
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“The March quarter numbers have been rendered irrelevant because of the disruption due to the second wave of Covid-19 infections, as far as economic momentum is concerned. With most states extending lockdowns into June, the first quarter of 2020-21 will be disappointing”, said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “Also, NSO itself has flagged the possibility of revision on the last quarter’s numbers because extension of statutory filing deadlines could have introduced a favourable bias in the corporate sector performance statistics.” Chief Economic Adviser Krishnamurthy Subramanian admitted that momentum of economic recovery has been affected by the second wave and “continued monetary and fiscal policy support” are needed to boost growth.
“Overall economic impact of the second wave is not likely to be very large” but “localised or statewide restrictions adopted to combat its spread, present some downside risk to growth” in the first quarter of 2021-22, he added. The wave has peaked, he pointed out, and “the pace of decline is as fast as the rise”. He, however, stressed on the need to enhance pace of vaccination coverage and strict observation of Covid-appropriate behaviour.
Still, the impact could make itself felt in the overall GDP growth number for the year.
“The combination of Covid’s second wave and the revised base effect may imply a lower GDP growth for the Indian economy for 2021-22, which may be in the range of 9-9.5%.” Indeed, as Alok Sheel, RBI chair professor in macroeconomics at Indian Council for Research in International Economic Relations (ICRIER) said, “the consensus number for this is now down to below 10% on account of the severity of the second wave of Covid 19.”