Second wave of Covid-19 pandemic pushed GDP into deepest contraction

Latest GDP estimates released by the NSO reaffirmed the economy witnessed its deepest contraction in the aftermath of the pandemic since FY50-51, the year in whi­ch national accounts compi­lation begun. Real GDP registered a contraction of -7.3 per cent YoY in FY20-21, marginally better than the earlier estimate of -8 per cent. With this the size of the econ­omy was 3 per cent smaller in March 2021 compared to Ma­r­ch 2020. 

The first half saw a recession with a de-growth of -16 per cent, followed by a recovery in the second with 1 per cent growth, on the back of non-farm economic acti­vity slowly reviving with gradual unlocking. This V-shaped turnaround in growth was driven by a recovery in manufacturing and a mixed speed improvement in services sector activity. On the spending side, private final consumption expenditure (PFCE) registered a de-growth of -9.1 per cent YoY, as the national lockdown had a deleterious impact on incomes and employment over the first half of the year. In fact, PFCE recorded a contraction for the first time in past four decades. The situation changed over the second half as gradual unlocking, easier fin­ancial conditions and higher household financial savings, helped stoke pent-up demand.

The second half of the year also saw an enc­ouraging sign for sustainable long-term growth - a pick-up in the pace of gross fixed capital for­mation with a 10.85 per cent YoY growth in Q4, led by public capex push by the central and state governments. For the full year, however, GFCF contracted by -10.8 per cent YoY. A coordinated and unprecedented fiscal and mon­etary policy support amounting to 15.7 per cent of GDP, helped cushion the impact of the pandemic over the year. Fiscal policy focus in particu­lar turned towards reviving growth through direct public investments in infrastructure and encouraging private investments through an extended PLI scheme.

The fourth quarter showed promising signs of the growth momentum improving, as can be seen by a sequential pick-up in the pace of growth of both manufacturing and services, from Q3 to Q4, helped by normalising demand conditions. However, as the year drew to a close, the biggest risk to the nascent recovery re-emerged in the form of a severe second wave of the pandemic, highlighting the need to urgently address this public health crisis through large scale vaccinations. The outlook on growth has once again turned uncertain and dependent upon the dura­tion and the impact of the second wave. 

Gaurav Kapur

While a 10 per cent growth for the full year FY21-22 is still possible, especially as the peak of the second wave seems to behind us and the vaccination prog­ram is slowly gathering momentum, the balance of risks remains on the down­side. A supportive policy envir­onment is already embedded in the form of accommodative monetary policy and an expansionary fiscal policy stance. Global economic environment can also act as a tailwind with growth prospects of a large economies improving helping to boost global trade. Any negative spillovers from higher global rates on the back of inflation resurgence can be absorbed without tightening the policy levers through the use of abundant forex reserve stock and a flexible exchange rate. Managing the pandemic will, however, remain the most crucial determinant of driving a recovery though, as its negative impact can be more perv­asive and persistent. Economic costs of this crisis are already steep, as highlighted by the OECD’s latest growth forecast for India, which projects that output in India by end of March 2022 to be lower by 10 per cent compared to its pre-pand­emic November 2019 projections. Thus, stopping the pandemic in its tracks and focusing on investment led recovery, should guide policy agenda ahead.

The author is chief economist at IndusInd Bank . Views expressed are personal