Long road to recovery

Q2 numbers encouraging, but outlook is still fairly uncertain

The Indian economy did better in the second quarter of the fiscal year than what many had estimated, with gross domestic product (GDP) contracting by 7.5 per cent in real terms, compared with a decline of about 24 per cent in the previous quarter. Most analysts were pencilling in a contraction of at least 8 per cent and the final print surprised even the recent optimistic revisions in the market. The smaller than expected decline has now raised hopes of a quicker recovery. Economists at the Reserve Bank of India are expecting GDP to break out of contraction in the current quarter itself.

But the pain in the Indian economy is unlikely to end anytime soon. Even as economic activity is widely expected to improve sequentially, a surge in Covid-19 cases can again affect confidence and demand. Further, despite the second-quarter numbers, consumer and investor confidence may not get a boost in the near term. For instance, the biggest surprise was growth in the manufacturing sector. However, the expansion of 0.6 per cent was on the back of a contraction in the comparable quarter last year. Even at aggregate level, it is worth recalling that growth had slipped to 4.4 per cent in the second quarter of the last fiscal year. Thus, the change being measured in the current year is on a relatively weak base. It is also likely that both pent-up and festive demand gave a temporary push in the second quarter, but that may not be sustainable. Some of the lead indicators, such as electricity generation and mobility, are already showing signs of moderation. Besides, the National Statistical Office in its press note highlighted the data-related issues, which could result in a significant revision in GDP estimates. The numbers may not be adequately reflecting the state of the unorganised sector, which is likely to have suffered more than the organised sector. Therefore, it could take a while to arrive at a more accurate estimate.

The biggest risk to recovery is still a resurgence in infection, as is being witnessed in other parts of the world such as the United States. Although the news on the vaccine front is encouraging, it may not be available for mass use quickly. In terms of policy interventions, given the inflation condition, the Monetary Policy Committee is likely to leave the policy rate unchanged in its meeting later this week, though the central bank would need to revise its growth and inflation forecasts. On the fiscal side, the government pulled back sharply in the second quarter, but might find space to spend more in the second half of the year with the improvement in revenue collection. The policy discussion, however, would soon shift to Budget expectations. The government will be expected to show some fiscal consolidation beginning next year itself and might have to depend on the increase in revenue to support higher expenditure.

At a broader level, even though the headline growth numbers would show an improvement in the coming quarters, in absolute terms the economy would regain its pre-pandemic size perhaps only towards the end of the next fiscal year. It will be a long road to recovery and the medium-term outlook remains fairly uncertain.