The Indian economy did better than most economists expected in the second quarter (July-September) of the current fiscal year. A GDP contraction of 7.5%, after a massive 23.9% in the June quarter, is, by all means, a significant sequential improvement. It shows that the June quarter number was a reflection of the 68-day lockdown rather than any massive damage to the productive capacity of the economy.
To be sure, the latest GDP numbers are not surprising. Many high frequency indicators had signalled improvement. But the pandemic-induced challenge is far from over. Some economists have pointed out that the second quarter had the fortunate confluence of pent-up demand (due to the lockdown) and advance production for the festive season. These tailwinds might dissipate going forward. There is also the question of the slowly but steadily building demand squeeze due to a continuing weakness in labour markets and cost cutting by firms. An HT analysis of 2,400 companies shows that their profits went up in the September quarter despite sales going down. This has been achieved via a cut in costs including salaries. The most worrying part of the GDP numbers, however, is the pro-cyclical turn in government spending. There has been a deterioration on this front compared to the first quarter. While the Centre has announced many schemes to cushion the pandemic’s impact, a fall in government spending shows that the actual fiscal support has not been commensurate. This needs to change.
There is also a big-picture message in the latest GDP numbers. India’s economic challenge in a post-Covid world is not going to be a restoration of positive growth rates. That is more a question of when (December or March quarter) rather than if. The real question is whether the economy can regain a high growth trajectory which gave way to a long deceleration phase even before the pandemic struck. This will require a vision and strategy for growth and ensuring that there is no permanent damage from the disruption. The government has unleashed critical second generation reforms, which could unleash hitherto unexploited growth possibilities. However, these possibilities will only materialise if there is a strong domestic demand. That should be the priority now.