With the Indian economy witnessing a real GDP growth rate of 8.4 per cent in Q2 FY22 as against a contraction of 7.4 per cent in Q2 FY21, gross value added rising by 8.5 per cent, and almost all the high frequency indicators looking good, the economy appears to be back on the recovery track and towards normalisation.
On the demand side, amongst the four growth engines, private final consumption expenditure, which constitutes 54.5 per cent of GDP, exhibited a growth of 8.6 per cent, gross fixed capital formation rose by 11 per cent, while government expenditure increased by 8.7 per cent.
On the supply side, agriculture, manufacturing and mining saw a steady growth of 4.5 per cent, 5.5 per cent and 15.4 per cent, respectively. Construction activities witnessed a growth of 7.5 per cent. Contact-intensive sectors such as trade, hotels and transport , and financial, real estate and professional services witnessed a growth of 8.2 per cent and 7.8 per cent, respectively. In absolute terms, GDP for Q2 FY22 at ₹35.73-lakh crore was higher than in Q2 FY20 — pre-Covid period — when it stood at ₹35.61-lakh crore.
The improved macroeconomic situation in Q2 is a result of the Covid second wave abating, resulting in the easing of State and regional lockdowns.
The second quarter of this fiscal witnessed record merchandise exports of $102.15 billion; it’s the first time ever exports exceeded the $100 billion mark in the September quarter, according to the Commerce Ministry. The silver lining is the remarkable growth in investments, the second most powerful growth engine, constituting 32 per cent of GDP, at ₹11.42-lakh crore in Q2 FY22 as against the pre-Covid level of ₹11.25-lakh crore.
As the festival season approached, output, new orders and exports returned to expansion mode, and the IHS Markit Manufacturing Purchasing Manager’s Index (PMI) touched 55.3, 52.3 and 53.7 (above 50 signifies expansion) for July, August and September, respectively.
However, while private final consumption expenditure did see a rise, at ₹19.48-lakh crore in Q2FY22, it was still below the pre-Covid level of ₹20.19-lakh crore in Q2 FY20. Rural demand, backed by a fairly strong kharif output, was resilient and outpaced urban demand . Due to increased mobility levels, Q2 FY22 saw a rise in out-of-home consumption and sales of discretionary items.
Business sentiment
The progress made in Covid vaccinations has led to improvement in the business situation and a steady revival in consumer confidence. Rating agencies, brokerages and financial institutions have, therefore, revised their GDP growth numbers for FY22.
Moody’s Investors Service has predicted that India’s growth is likely to rebound strongly and has pegged GDP growth for FY22 at 9.3 per cent. Goldman Sachs, SBI Research and UBS Securities have upped their GDP forecast to 9.1 per cent, 9.3-9.6 per cent, and 9.5 per cent, respectively. The RBI has maintained its growth forecast at 9.5 per cent.
While the country seems to be fast returning to the trajectory of a durable economic recovery, it would be prudent to keep an eye on domestic and global headwinds — the biggest looming threat being the new virus variant, Omicron. The latest variant poses a renewed risk to not only global but also that of India’s growth. Economies across the globe are upping the antennae, by renewing curbs and restricting travel for visitors from the impacted regions. This could worsen the existing global supply chain constraints, which have been prevailing for over a year now.
To add fuel to the fire, a surge in fresh Covid cases in Europe has led to Austria announcing a lockdown and Germany and Belgium, among others, renewing focus on precautionary measures. This has dealt a major blow to investor and business sentiments, especially FPIs. Crude oil prices have been a cause of worry, with the US, India, Japan, Britain and South Korea announcing releases from their strategic petroleum reserves.
Also, the spike in US inflation rate to 6.2 per cent (highest in three decades) has put pressure on the US Federal Reserve to raise interest rates sooner than planned, and the Fed chief, Jerome Powell, went on to say “it is probably time to retire the word ‘transitory’ when describing inflation”.
On the domestic front, while the biggest growth engine, private final consumption expenditure, has shown a rise, it has still not reached pre-Covid levels. Google’s workplace mobility index shows that as of last week of November, it is 5 per cent above the baseline, while the mobility trends for retail and recreation are still 3 per cent below the baseline.
Non-economic factors
Consumption demand in the present situation is more related to non-economic factors. Due to fear of contracting the virus, people are not venturing out to brick-and-mortar stores, resulting in demand remaining restricted. Offline shopping will motivate people to imitate consumption trends adopted by others, thus triggering the demonstration effect of consumer behaviour.
Additionally, the increased Wholesale Price Index numbers can further affect consumption demand.
Also, the ripple effect of the government repealing the three farms laws has to be dealt with. While the country is aiming to be a $5 trillion economy and build an ‘Atmanirbhar Bharat’, the much-needed reforms — on the labour, land , administrative, judicial and electoral fronts — required to achieve the same are likely to be put on the back-burner as the 2024 elections approach.
In the current juncture, the primary way to boost demand and help the economy return to normalcy is to continue the vaccination drive, improve healthcare management and introduce appropriate fiscal measures.
Jagadish is Professor, and Pooja is Associate Professor, of Economics, Birla Institute of Management Technology, Greater Noida