Silver linings

The Q2 GDP growth figure of minus 7.5 per cent looks better than what many economy observers had anticipated. On the world scale, it still compares poorly with most major countries, except perhaps the UK, Spain and Mexico. China remains an outlier, and has recorded nearly 5 per cent growth in the July-September quarter. A marked revival over the last quarter has been a feature of most developed economies, even as they remain in the negative territory. The challenge in India, blessed with good South-West monsoon this year that has held up the rural sector, is to keep up the ongoing industrial and service sector revival. Export prospects do not look promising for now.

As in the previous quarter, 3.4 per cent agriculture growth (in gross value added terms) lifted the economy as a whole. Notably, manufacturing entered the positive territory, in tune with the improvement in core sector indices such as electricity output, growing 0.6 per cent, against minus 39.3 per cent in Q1 this year, and minus 0.6 per cent in Q2 of 2019-20. Construction de-growth, too, narrowed sharply in sequential terms from minus 50.3 per cent to minus 8.6 per cent, a figure that may turn positive in the next few months, given the boost to affordable housing. The slump in the trade, transport and communications, at minus 15.6 in Q2 is disconcerting even if better than minus 47 per cent in the previous quarter. The revival of this sector would depend on the duration of the pandemic and the availability of vaccines.

The lower slump in consumption expenditure this quarter (minus 11.3 per cent, year-on-year, against minus 25 per cent in Q1) mirrors the uneven improvement across industrial and services sectors. It indicates paucity of incomes, uncertainty of sentiment and an indifferent jobs scenario — even as the mood is picking up. The investment slump in relation to the previous year has narrowed as well — from a dramatic 98 per cent fall in Q1 to a 7.2 per cent fall in Q2. In sequential terms, capital formation has risen about 60 per cent, against a dip in Q2 of last fiscal in relation to Q1. A striking feature is the squeeze in government spending by 22 per cent y-o-y, against a rise of 16.4 per cent in the last quarter. This shows that the rising fiscal deficit is being led by revenue contraction. Despite the green shoots, it is too early to say whether bank credit, now growing at 5 per cent, and the liquidity push will translate into the requisite pick up in private investment, even as the government cuts back. The government must push capital expenditure in this scenario.