Economy Reaches About Pre-Covid Size, But Some Sectors Are Lagging


The main takeaway from the second quarter GDP figures is that the overall economy has returned to pre-COVID levels. Total production at constant prices was Rs 35.73 trillion against Rs 35.61 trillion in the second quarter of FY20. The pace of growth, both year-over-year and quarterly, is an impressive 8.4%, a good half a percentage point higher than the Reserve Bank of India’s (RBI) forecast of 7.9%.

The economy has grown largely on the shoulders of agriculture and allied sectors, with production at a low rate of 7.5% from July-September 2019 levels, a CAGR ( compound annual growth) of 3.5%.

“Public administration and personal services” also experienced strong growth of 6.5% compared to July-September 2019 levels. In this context, we know that public administration has not increased much, so it is clear that personal services have picked up strongly.

Manufacturing and – to a lesser extent – construction have pushed back and even exceeded pre-COVID levels, albeit marginally.

The bad news comes from the large service sector called “Commerce, Hotels, Transport and Communication”. Its size at 5.79 trillion rupees is still 10 percent smaller than 6.38 trillion rupees in the second quarter of fiscal year 20. From being 1 / 5th of the economy, this sector has shrunk to 1 / 6th in the economy. This is worrying because this sector employs a large part of Indian MSMEs and self-employed workers.

GDP on the expenditure side has grown largely due to increased investment spending. Gross fixed capital formation now represents 32% of GDP, which is excellent. The economy reinvests a third of what it produces, said Dr Sudipto Mundle, economist and member of the Fourteenth Finance Committee of India. This can be an engine for future growth. But the laggard is the hitherto powerful engine of India’s growth: private final consumption expenditure or PFCE.

The CCTB at Rs 19.7 trillion is 3.5% lower than the pre-COVID level, reflecting lower consumption by those who lost their jobs in commerce, commerce and transport. Government final consumption did even worse, falling below 17% from its comparable pre-COVID quarter.

Valuables, that is, savings invested in gold, have tripled from pre-COVID levels, likely reflecting a hedge against inflation.

The main takeaway from the second quarter GDP figures is that we need to restore the informal sector and MSME jobs in trade, commerce and transport space. Public spending and consumption must also increase. But the economy has shown some innate recovery, as evidenced by the 11% year-over-year jump in capital formation. This growth may expand further, given low interest rates and deleveraged corporate balance sheets and healthy banks’ books. But for capital formation to increase sustainably, private consumption must increase.

This requires some of the capital to be invested in construction and services which are more labor intensive. Job growth can stimulate private consumption, which is the second important engine to set in motion for the economy to grow. India may hit double-digit growth in FY22, unless, as CEA Krishnamurthy Subramaniam said, the virus has other plans.

But for sustained growth of 7% thereafter, we must persist in job creation and qualification.

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