Registering a sharp contraction in economic growth, the GDP number for Q1 of 20-21, has come at -23.90%, a deep fall, the worst ever, which is the direct consequence of the pandemic and the lockdown. A fall close to -20 % was more or less expected by a number of market participants. Even with some improvement in the economic variables in the coming three quarters, the growth for the whole year would be around -5% to -7% range for the whole year. The probability of this number being revised is quite high given the fact that there have been practical difficulties around data collection and estimation on manufacturing and industries, and consumer prices. Revisions happen when the data of smaller corporates and informal sector are incorporated later. Probability of the numbers turning more adverse is quite high.
Except for agriculture across sectors including services, manufacturing, trade, etc. have shown an unprecedented fall. Whether it is private consumption or capital formation, the numbers are hugely negative and would require more action from the government, though the government’s fiscal position does not leave much room for further action.
A closer look at the GDP data shows that construction took the steepest hit, while manufacturing and trade, hotels,
transport etc. too came down sharply. Agricultural sector alone showed growth at 3.40%. Mining contracted by 23.80%, manufacturing shrunk by 39.3%, while construction fell by a whopping 50.30%. Trade and transport and hotels contracted by 47%, with Financial Services decline at 5.30%.
Going by the expenditure side, the private Final Consumption Expenditure and Gross Fixed Capital formation contracted by -26.70% and -47.00% respectively, while the Government Final Consumption Expenditure grew at 16.40%. Excluding government expenditure, the contraction is 30%.
The core sector numbers too indicate nothing different regarding the state of the economy. The core sector growth for July contracted by 9.60% compared to versus 12.90% decline in June. This may look a shade better compared to the April and May numbers which were at -37.90% and -22% respectively. The eight infrastructure industries in the index, coal, crude oil, natural gas, refinery products, fertiliser, steel, cement, and electricity, has 40% weightage in the Index of Industrial Production or IIP. This reflects the state of industry and manufacturing, but some comfort may be drawn from the fact that these numbers are more or less on the same lines as expected, and the severity of the fall is mainly due to the pandemic and the lockdown which affected all businesses and entities. The intensity of the fall seems to be tapering off, but the extent of the recovery would be solely dependent on the effectiveness of the control over the pandemic and its likely second wave, and also the extent to which business establishments and industrial units come back to fullfledged operations.
The numbers clearly indicate the need for a demand-led or consumption-led recovery which is very crucial for the
economy and it may require measures by which the disposable income of people is enhanced. Such measures have to necessarily come from the fiscal side of the policy. But the difficulty is that the room available for the government is too limited at this moment. The position of government finances is too precarious with a widening fiscal deficit, saddled with a huge borrowing program, and dwindling tax revenues. The substantial tax benefit given to corporates has not borne any fruits and the individual taxpayer has not received any tangible benefit to enhance his propensity to spend beyond the present. Given the current fiscal situation and the related challenges, no major initiatives could be expected from the government.
