India likely to reach pre-Covid growth levels by fiscal-end: Finmin

Warns second Covid wave may derail recovery as breach of social distancing is being observed

The finance ministry on Wednesday said the economy has been recovering at a fast pace and would likely to reach pre-Covid-19 levels by the end of the current fiscal year. It, however, cautioned that the second wave of the pandemic could derail the recovery and warned against the breach of social distancing. 

The finance ministry’s Department of Economic Affairs (DEA) in its Monthly Economic Review for October said that the continuous improvement in forward-looking Reserve Bank of India (RBI) indices of consumption and business sentiment for the next year gave hope for a strong economic rebound. This was also corroborated by the International Monetary Fund’s (IMF’s) October 2020 projection of 8.8 per cent real GDP growth in India for the fiscal year 2021-22 — the best among large economies, the report noted. 

The IMF last month had said the Indian economy was severely hit by the pandemic, and would likely contract by 10.3 per cent this fiscal year. 

Cautioning about a fresh wave of the pandemic, it said: “A steady contraction of active Covid cases and a low case fatality rate have instilled measured optimism in India that the worst is behind us. But a second wave of the pandemic in advanced nations is a grim reminder of how reality hits back when caution is compromised.” 

Pinning hopes on festive seasons for growth momentum, the finance ministry said that overall consumption is expected to see a further uptick in the coming months, enhancing prospects of a faster economic normalisation. About the high-frequency indicators, the DEA said most parameters in October showed improvement – a healthy kharif output, rise in power consumption, rail freight, auto sales, vehicle registrations, highway toll collections, e-way bills, a rebound in GST collections, and record digital transactions. 

Among the worst-affected sectors, aviation picked up gradually in October. There was also a significant increase in the number of domestic aviation passengers -- from 280,000 in May to 2.83 million in August, and 3.94 million in September. 

“Given that there are indications of India’s GDP growth in the current year being higher than currently projected by various agencies, fiscal space is set to widen to accommodate other priorities of the government. This is evident in the GST collection crossing Rs 1 trillion in October for the first time since February,” report said. 

Rural consumption, too, has stayed strong, in part helped by sustained procurement of foodgrain at MSP by the government at higher prices, the report claimed. 

It further said the prospects of economic normalisation are also evident in the external sector indicators with consumption of petroleum products increasing in September and exports rebounding strongly with year-on-year positive growth for the first time in seven months. 

On export growth, it said that it saw some moderation last month, primarily driven by weak oil exports. 

The government said global investors continue to be upbeat about India’s economic prospects, with gross FDI inflows crossing $35 billion during April-August 2020, the highest ever for the first five months of a financial year. 

With net FPI inflows staying robust in October, rupee stood strong at about 73 to a dollar on the back of forex reserves, now comfortably settled in excess of half a trillion dollar. 

It noted India's current account balance, which recorded a surplus of $19.8 billion in the April- June 2020 quarter at 3.9 per cent of GDP. With a surplus trade balance in April-September 2020 and resilient remittances, the current account surplus is likely to be sustained in subsequent quarters. The probable current account surplus in this year, thereby, provides a cushion to increased spending in the economy, the report said. The Centre’s fiscal deficit stood at Rs 9.14 trillion during the first half of FY 21. 

On the revenue side, gross tax revenue registered a negative growth of 21.6 per cent because of negative growth in all direct taxes and major indirect taxes, except excise duties. Non-tax revenue collections fell 55.9 per cent YoY during April-September. 

India’s fiscal space in the pandemic period has been characterised by additional spending. This has been directed towards ensuring a basic means of sustenance and livelihood for the vulnerable people, relief measures for micro, small and medium enterprises (MSMEs), accommodating additional health infrastructure and services to fight Covid-19, and measures to boost consumption demand. "The fiscal space is also characterised by recent measures announced to lend to states for increasing capital expenditure, providing them assistance under SDRF and borrowing on their behalf to meet GST revenue shortfall," the review note said.

As of 23 October, the Centre’s gross market borrowings during the current fiscal reached around two-thirds of the annual target ( Rs  8.2 trillion), 1.67x higher than gross market borrowings during the corresponding period of the previous year. This is against the revised target of Rs 12 trillion. 

Besides, food prices have been under pressure but are likely to smoothen out with prospects of a good kharif harvest and reduced supply-side disruptions in the inter-state movement of food products. 

Further, a decline in growth in demand deposits is also reflective of strengthening demand and more pertinently of a smaller inclination towards precautionary savings that the pandemic had induced to weaken consumption and growth. The decline in growth of cash in circulation further reflects a shift away from precautionary savings. 

The corporate sector has seen growing success in mobilising funds from the capital market, both through public issues and private placement, reflecting the development of an alternative to bank credit.