On the mend

Given the low-base effect caused by the 24.4 per cent contraction in the same quarter of last fiscal, the latest GDP print showing India’s real economy expanding a ‘record’ 20.1 per cent in Q1 FY22, doesn’t offer much cause for surprise. In fact, real GDP growth has come in slightly below both the Reserve Bank of India (RBI) forecast and consensus expectations, which had projected 21.4 per cent and 21 per cent respectively. The numbers, which show a broad-based recovery, feature some bright spots though.

One, agriculture and allied activity, which was expected to halve its growth compared to last year’s, has held up well growing 4.52 per cent this year, despite a dodgy monsoon. Two, high-contact services, which were expected to remain under the weather due to Covid’s second wave, have fared better than expected too. With Q1 of this fiscal seeing largely localised containment measures, manufacturing and mining were expected to bounce back strongly, which they did with growth of 50 per cent and 19 per cent respectively. But it is a surprise that construction grew 69 per cent and trade, hotels, transport and communications by 34 per cent year-on-year. As these high-contact services are also employment intensive, this augurs well for a revival in incomes. Financial services and real estate, which weren’t much affected by Covid last year, managed 3.8 per cent growth, with the result that every sub-segment of the economy managed to show expansion. A muted contribution from public administration expenses shows that private actors and not government largesse is driving this rebound. Three, it is also good news that while real GDP was 9.2 per cent below pre-pandemic levels, inflation helped nominal GDP claw back to levels 2.3 per cent higher than Q1 FY20. While inflation is a mixed blessing, in India, moderate doses of it have been essential for animal spirits to revive. On the flip side, sequential and pre-pandemic comparisons show that select sectors do have a long way to go to throw off the Covid effect. Worst affected among these are trade, hotels, transport and communication services where activity levels are down 30 per cent compared to pre-pandemic levels, and construction, which is 15 per cent lower. This is where sector-specific stimulus measures perhaps ought to focus now, given that industry — helped by corporate tax rate cuts, an informal to formal sector shift and production incentives — is getting back to even keel.

The expenditure side break-down shows that the Centre and the RBI’s concerted efforts to revive the capex cycle have perhaps helped, with fixed capital formation and exports showing year-on-year growth at 55 per cent and 39 per cent respectively. Unfortunately though, these two drivers make a much smaller contribution to GDP than private consumption which remained 5 per cent below pre-pandemic levels. Reviving this leg, even if it means the government giving away some tax concessions, may be the logical next step to sustain this rebound.

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