Short-lived revival

There can be no denying that the 1.6 per cent provisional Q4 FY 21 GDP growth has come as a pleasant surprise vis-a-vis the second advance estimates; as a result the growth rate for 2020-21 actually looks better at minus 7.3 per cent, as against minus 8 per cent estimated earlier. Leading this revival was a growth in government expenditure and fixed capital formation in the fourth quarter, which were up by 24.4 per cent and 18.2 per cent, respectively, at current prices. However, the 6.6 per cent increase in private consumption expenditure in Q4, a reflection of pent-up demand after a sustained period of lockdowns, needs to become a sustained affair for the economy to get back on its feet. As such, the demand side looks bleak, if 2020-21 as a whole is taken into account: a 6.1 per cent decline in private consumption, a 8.6 per cent decline in capital formation and a 7.4 per cent rise in government spending, all in current prices. An elevated fiscal deficit seems par for the course in a time of tepid consumer demand and derived investment demand, with the caveat that it is driven by capital spending as envisaged in the 2021-22 Budget. Supply side measures such as the Atmanirbhar package announced last May have not so far translated into a pick-up in credit. Manufacturing and construction revived in Q4, reflecting a post-lockdown surge attributable to a combination of pent-up and basic demand for cars, consumer durables and even apartments.. The services sector, a lockdown casualty, remained badly hit.

Going forward, consumer sentiment is likely to be at a low ebb thanks to the second wave of the pandemic. The RBI’s Consumer Confidence Survey released in April says “respondents expressed lower optimism for the year ahead, which was expressed in the future expectations index”. If the optimism on employment and the general economic situation remained feeble, the price situation was perceived as grim. There are reasons to believe that the earlier optimism on jobs, reflected in the Survey, would have reversed with the onset of the second wave. The prospect of runaway health expenditures is likely to increase precautionary savings. On the supply side, the impact of the rural spread of the pandemic on both farm productivity and spending remains uncertain. Understandably, observers such as SBI have sharply downgraded their growth numbers for this fiscal to single digits — in SBI’s case from 10.4 per cent to 7.9 per cent. The hope is that the Q1 washout can surely be arrested in subsequent quarters.

For consumer and investment confidence to return, the government must focus on vaccinating the working population at the earliest. While cost-push inflation arising from commodity prices and lockdowns remains a supply bottleneck, consumer sentiment remains the chief constraint to ramping up investment. The focus should be on creating public goods in health and other infrastructure, crowding in private spending and releasing unused capacities.

COMMENT NOW