By Administrator_India
The Indian economy contracted 7.50 percent in the second quarter of this financial year against a decline of 23.90 percent in the first quarter. Technically, the country is in a recession following two straight quarters of contraction but the slowdown is gradually easing.
The gross domestic product (GDP) growth is at an 11-year low, compared to 4.20 percent in 2019-20 and an expansion of 6.10 percent in 2018-19. It is to be understood that the slowdown in growth accentuated and converted itself into a recession, with the pandemic and the lockdown and the demand destruction that followed.
The Keynesian prescription for recession is pushing up aggregate demand through government spending. And it works. But one should draw comfort from the fact that GDP is better-than-expected and the number for the whole year could be somewhere between -7 percent and -8 percent, which would be a shade better than what has been forecast, so far. This also assumes that growth may be positive—at least mildly positive— in the coming two quarters.
While agriculture remains at 3.40 percent growth, other key sectors like mining, construction, hotels, transport and real estate remain in the negative mode. Some of these areas are labour intensive and their dependence on migrant labour is extremely high, like construction and real estate. Unless labour moves in, full recovery in these sectors may take more time.
A closer reading of the GDP numbers along with the core sectors and IIP numbers would make better sense of some of the sectoral lags. The data on small businesses and smaller corporates and informal sector also needs to be incorporated to see the actual ground level improvements, which happens at a later stage.
Private final consumption expenditure and the gross capital formation have shown improvement, whereas government final consumption expenditure has fallen.
The reasons for the pickup in expenditure can be linked to the unleashing of the pent-up demand and the consequent surge in demand. There has been some movement due to the demand emanating from the festive season.
Here also, what needs to be considered is the fact that the rise seen here need not necessarily be sustainable and only in Q3 numbers we’ll get sufficient data to confirm the trend of improvement.
We need to be vigilant about what can overturn this growth, resulting in further choking of the veins of the economy. The first is a serious return of the pandemic in a second or a third wave. This can disrupt everything and put the clock back again to where we were at the start of the pandemic. But the likelihood of such a serious disruption seems to be very remote.
A second and more critical threat to growth may emerge from rising inflation. The Consumer Price Index (CPI), as per the last reports, is at 7.61 percent and food inflation at 11 percent. Over the last couple of months, food inflation has spread to all major items apart from fruits and vegetables.
Something that is still more worrying is the rise in oil prices. Brent is edging closer to $50 per barrel and prices may not come down in winter. Higher oil prices may have inflationary impact unless some of the local taxes on fuel are brought down.
While inflationary pressures may persist for another two or three months, if they gets prolonged, then the Reserve Bank of India might act to contain the price level because the central bank may never be party to imposing a tax on the common man by way of higher price when they are already going through too much.
While central banks elsewhere are praying for higher inflation, whether it is the US or the EU, we will not be in a position to accommodate higher prices even for a short time.
