The 8.4 per cent growth in real GDP during the second quarter of this fiscal suggests that the Indian economy has recovered rather well from the debilitating impact of the second wave of the pandemic. But this growth number should not lull us into complacency. A closer look at the expenditure side shows that private final consumption expenditure at ₹19.4-lakh crore in the September quarter, while being slightly higher than in the June 2021 quarter, is still well below ₹21.7-lakh crore recorded in December 2019 quarter. Despite the pick-up in vaccinations, private consumption that accounts for 54.5 per cent of the GDP is yet to reach pre-pandemic levels. Amidst this softness in consumer spending, it appears that the government’s effort to boost growth through capex is losing momentum. While gross capital formation hit a peak of ₹13.3-lakh crore in March 2021 quarter, it has decelerated since then, with expenditure of ₹11.4-lakh crore in the September quarter. The Centre will have to renew efforts to boost capex and push States in this regard. In a recent address, RBI Governor Shaktikanta Das observed: “Fiscally strong states could indeed lead the expenditure drive in critical areas of public infrastructure. This... can also kick-start an all-India investment cycle with positive spill over to other States.”

On the income side, agriculture and services sector displayed resilience while manufacturing sector lost buoyancy. Some comfort can however be drawn from the fact that India’s Q2 growth compares favourably with most major economies. The US and China witnessed deceleration in growth due to rising input costs, labour shortages and Covid cases. India’s growth may continue to be robust in the next quarter going by the readings of high speed indicators such as the manufacturing and services PMI, industrial output numbers, GST collections, air traffic and fuel consumption. That said, there are some headwinds. First, pandemic related uncertainty has made a global comeback. Second, India’s wholesale price inflation, at 12.5 per cent in October, will add to input cost pressures. Meanwhile, the supply push through PLIs, infrastructure and for telecom, besides pandemic-induced monetary policy initiatives, is perking up capex sentiment. On the whole, the economy is well placed to shrug aside pandemic blues — if inflation and other external headwinds recede.

The Centre and the RBI should also keep in mind the dichotomy in growth while framing future policies. While the formal sector is in fine fettle, micro businesses have been impacted severely by the pandemic. Many of these have had to face permanent hits to business due to changing consumer habits brought about by the pandemic and the proliferation of e-commerce. Rural consumption, which had supported growth last year, is showing signs of flagging now as the government scales down its support to the rural employment generation scheme. Given the somewhat weak growth in consumption, the RBI cannot afford to increase policy rates yet. It should continue to maintain an accommodative policy stance.