Not A Steady Climb

The Indian Express     2nd June 2021     Save    

Context: Targeted fiscal support, swifter inoculation will be critical for economy to bounce back.

Various challenges faced by the Indian economy:

  • Decline in GDP: The latest Provisional Estimate of the Indian economy pegged the contraction in GDP at 7.3% in 2020-2021.
    • The gap between GDP and GVA (gross value added) growth has been the widest since 2011-12 because of a sharp increase in subsidies, including arrears.
    • Contact-based services — particularly tourism, hospitality, and airlines — were deeply scarred; the “trade hotels, transport, etc.” category posted the sharpest annual contraction of 18.2%.
    • Decline in consumption:
      • Private consumption contracted by 9.1% and was only 3.1% above the 2017-18 levels.
      • Household savings plateaued at 8.1% in the third quarter, down from a high of 21% in the first.
    • Declining investments: Gross fixed capital formation fell 10.2% — a good 6.9% below 2018-19 levels; low capacity utilisation and uncertainty will discourage further investments.
  • Less support from the rural economy: The rural spread of the pandemic raises the risk of supply-chain disruptions for agricultural products.
    • Growth in rural wages has also softened, and lack of enhanced fiscal support will keep rural consumption demand muted.

Growth maintaining sectors:

  • Agriculture remained largely untouched by the pandemic and maintained its trend growth.
  • Manufacturing showed some resilience due to fewer restrictions and the ability to “live with the virus”.
  • Construction, a highly labour-intensive sector, rebounded sharply in the second half primarily because of increased spending by the government on building highways and rural infrastructure.
  • Import demand, driven by domestic economic activity, was much weaker than externally-driven export demand.

Way Forward:

  • Till we have vaccinated a material level of the population, policy support in general and fiscal support, in particular, must serve as a bridge to recovery, especially for vulnerable segments.
  • To soften the blow to the rural economy, the government must priorities increasing the MGNREGA outlay and providing additional resources for ramping up health infrastructure.