RBI’s revised GDP growth estimates reflective of difficult road ahead for economy; employment, consumption to hold key for recovery

GDP- India

Urban demand reflected in high frequency indicators like electricity consumption, railway freight traffic, port cargo, steel consumption, cement production, e-way bills and toll collections – recorded sequential moderation in April-May as manufacturing and services get hit due to second wave

The latest Gross Domestic Product (GDP) numbers released by the Government for the financial year 2020-21 (April-March) show contraction of 7.3 per cent, which is a marginal improvement from the estimates of 8 per cent contraction in the second advanced estimates of the Government, released in February this year. Thanks to a sharp rise in government expenditure.

The GDP contraction for the financial year gone by, was largely on the back of April-June 2020 quarter contraction of 24 per cent. While on a low base, the recovery had been sharp, the overall GDP number is extremely worrisome and unprecedented in almost four decades. The country has never seen a contraction since 1980-81.

While the formal economy has been showing some resilience, it is the informal economy which has been hit severely with the pandemic after taking back-to-back shocks of demonetisation and Goods and Service Tax (GST).

If India has to restart its growth engine, a lot of handholding and support will be required to people from all walks – poor, middle class, unemployed, small and medium enterprises, specific sectors like tourism and aviation etcetera. India cannot thrive if the people on the margins are not supported now.

We must also realise that the growth in the pre-pandemic period was also slowing and people were hit with high unemployment leading to lower consumption.  Even the sentiments towards spending more money, taking a hit. In January-March last year (beginning of first wave in late March), the economy had grown just 3 per cent after consecutive sub 5 per cent growth over previous two quarters. There were demands of then putting more money in the hands of people. It has become more imminent now as the Pandemic has only added to woes.

The second coronavirus pandemic has come as a major blow for households in terms of their savings getting hit hard as the impact this time was much harsher in terms of deaths and people infected during the months of April and May. In the absence of adequate and equitable availability of medical infrastructure, the monetary losses have been immense for a common man.

FY gone by

India’s GDP grew 1.6 per cent in the fourth quarter (January-March) of 2020-21, just before the second wave hit the country. It grew by 0.5 per cent during the October-December quarter.

Before, the second wave hit the shores again, India was doing well on many important economic indicators including higher GST collections and e-way bills, auto sales number going up, residential sales numbers and manufacturing sector also doing well. The government and the Reserve Bank of India on multiple occasions emphasised on the occurrence of green shoots.

Gross Value Added (GVA) for manufacturing and construction sectors saw an uptick with the former seeing a jump of almost 7 per cent in January-March (Q4) as against 1.7 per cent growth in the previous quarter and 4.2 per cent contraction in the same period last year. This is in absolute terms. Meanwhile, the construction sector grew 14.5 per cent in comparison to 6.5 per cent in the October-December period and 0.7 per cent growth during the same period, last year.

GVA is defined as the value of output minus the consumption. It is a measure of the contribution to GDP made by an individual producer, industry or sector.

Agriculture has been another outlier holding up the rural economy. Though, the growth slowed to 3.1 per cent in the Q4 from 4.5 per cent growth in Q3 and 6.8 per cent growth in Q4 of FY20.

The contraction being less than what was estimated earlier, was primarily on these counts including investments from private sector and government. Private investment grew at 10.9 per cent in the January-March period.

Meanwhile, sectors including mining and trade, hotels, transport remained laggards, contracting by 5.7 per cent and 2.3 per cent, respectively.

Way Forward

Way forward is a difficult road on many counts. The RBI in its June Monetary Policy announcements has revised its GDP growth estimates downwards to 9.5 per cent from an earlier 10.5 percent. Its estimates on the real GDP growth is now projected at 18.5 per cent in Q1 (April-June), 7.9 per cent in Q2 (July-September); 7.2 per cent in Q3 (October-December) and 6.6 per cent in Q4 (January-March).

The estimates are based on the hopes of vaccination process gathering steam in the coming months which should help to normalise economic activity. The extent of recovery will depend upon how localised restrictions are eased. Moreover, there are already talks of a third wave, lurking now.

The RBI in its bimonthly policy has also noted that urban demand reflected in many high frequency indicators including electricity consumption, railway freight traffic, port cargo, steel consumption, cement production, e-way bills and toll collections – recorded sequential moderation during April-May 2021 as manufacturing and services activity weakened due to restrictions/lockdowns imposed by most states.

It has also warned that there would be downside risks due to the spread of COVID-19 infections in rural areas and the dent on urban demand pose.

It is being highlighted by many top economists, industrialists and analysts that the demand situation may not pick up as substantially this time as was seen after June last year when the economy was opened. There is not enough pent-up demand visible this time. The second wave has also been severe in terms of the cost that it has put on the savings of the people. The savings are down significantly and people are saving for future.

GDP estimates of top rating agencies

RBI lowering GDP estimates does not come as a surprise. Many credit rating agencies have done it reading the current situation of the economy. Moody’s Investors Services has slashed its FY22 economic growth forecast for India from 13.7 per cent estimated earlier to 9.3 per cent. It has also warned of risks from deeper stresses in the economy and financial system that could prolong recovery.

S&P Global Ratings expects India’s GDP growth at 9.8 per cent under moderate scenario and 8.2 per cent under the severe scenario. Another rating agency Brickwork Ratings has also reduced GDP growth from 9 per cent to 11 per cent estimated earlier.

The revision in estimates are based on several factors including easing of restrictions. While, we know that the restrictions are being eased and will be further done, going forward, but the virtuous cycle will only begin if the employment situation is improved and people are sure about the future. We should also hope that the next wave, if at all, arrives we are better prepared.

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