Silver linings

It is a sign of the times that the prediction of a 7.7 per cent contraction in India’s real GDP for FY21, its worst economic performance in several decades, is seen as an acceptable growth number, signalling a reasonably quick recovery from Covid-19. In projecting this in its First Advance Estimates, the Central Statistics Office is suggesting that real GDP, which fell by a drastic 23.9 per cent in Q1 of FY21 and 7.5 per cent in Q2 will return to an almost even keel in Q3 and Q4 with just a 0.1 per cent dip compared to the same quarters last year. The CSO expects per capita income to take a 5.2 per cent knock for the year (from ₹1.51 lakh to ₹1.44 lakh) and private consumption to dip 6.6 per cent (₹91,440 in FY20 to ₹85,359 in FY21). If the estimates come good, this would not be such a bad outcome for a year where economic activity was at a standstill for one whole quarter and resumed in bits and pieces in the following one.

Diving deeper, it is clear that the CSO expects agriculture and allied activities (growing 3.4 per cent in the second half, same as the first half), manufacturing (0.5 per cent against a negative 19.4 per cent), construction (4.4 per cent against minus 30.2 per cent) to do much of the heavy lifting to get the economy back on track in the second half. Mining (negative 8.3 per cent versus 17.2 per cent), trade, hotels and communications (minus 12 against minus 31.5 per cent) are expected to remain in recessionary mode. While the optimism on agriculture appears realistic given the relatively unscathed rural economy, active policy interventions may be needed to bring about the sharp rebound in manufacturing and construction. In services, particularly travel, trade and hospitality, much depends on the vaccine rollout being able to put consumers back in a spending mood. While the CSO expects a sharp fall in both private consumption and investments in FY21, it pins hopes on a 11.4 per cent increase in government spending. Thus far, it is RBI’s monetary interventions rather than the Government’s fiscal moves that have supported the battered economy. With persisting inflation now tying RBI’s hands, the ball is now in the Centre’s court to devise fiscal measures to keep the revival alive.

As some experts have pointed out, the First Advance Estimates of GDP carry limited utility for long-term policy decisions, as they are based on extrapolation of high-frequency indicators and listed company data, which may not represent large swathes of the informal economy. This challenge is made worse by Covid this year. But then, having these estimates to go by is certainly better than groping in the dark. One hopes that the upcoming Union Budget has specific and pragmatic measures to lift manufacturing, real estate and services, while fuelling productive government expenditure, as these hold the key to nurturing the nascent recovery.