Choked off momentum

Faster vaccination a must for durable economic rebound

Important new macro-economic data was released on Monday, providing a fuller picture of India’s economic recovery from the pandemic and the degree to which it has been stalled by the recent second wave of cases, alongside the fiscal space available to the government to deal with the emergency. The Union Ministry of Statistics released its provisional estimates of national income for the completed financial year 2020-21, alongside the regular quarterly estimates of that year’s fourth quarter from January to March. The headline number, gross domestic product (GDP) growth in the pandemic year of 2020-21, contracted less than expected, at only 7.3 per cent, year on year.

While this is unprecedented — India has not seen a GDP contraction for more than four decades — it is nevertheless a surprise on the upside when it is remembered that the first quarter of 2020-21 saw a contraction of more than 20 per cent. This better than expected number was partially driven by a strong recovery in the January to March quarter, which saw growth of 1.6 per cent, year on year, pleasantly surprising economists. Some subsectors in particular seem to have driven this momentum in that quarter: Manufacturing growth in particular, which came close to touching 7 per cent. Arguably, this positive number for manufacturing might be reflected in some recent strong corporate results. Finance, real estate, and other professional services grew 5.4 per cent as well. And construction, crucial for low-skilled employment, saw a definite rebound at 14.5 per cent growth in the fourth quarter of 2020-21. Even trade, hotels and communication, which contracted almost 50 per cent in the first quarter, was almost back to pre-pandemic levels by the fourth quarter.

Of course, these figures do not and cannot fully incorporate the effects of the second wave, including that of some stringent state-level lockdowns. It is likely that the momentum being built up for the recovery has been severely dented. It can also be argued that the numbers of the fourth quarter themselves reflect an excessively lax approach to social distancing, partly responsible for the second wave of cases and deaths. It is thus clear that, while the economy retains the capability to rebound when the virus is removed from the equation, the pandemic is still very much a factor. Trying to replicate the fourth-quarter rebound without more extensive public health measures, particularly vaccination, is a fool’s errand. Economists hope for about 10 per cent growth over the ongoing financial year 2021-22. But this will depend upon how quickly the virus is contained and the scale-up of the vaccination programme.

Also, released on Monday was the Controller General of Accounts’ estimate of the fiscal deficit for 2020-21, which came in at 9.3 per cent of GDP — marginally lower than the 9.5 per cent predicted in the Union Budget a few months ago. This figure is also unprecedentedly high. While the government insists GDP will snap back swiftly, the fiscal deficit will remain elevated in the foreseeable future. While the 9.3 per cent figure is not out of line for emerging economies — the IMF estimates the median deficit for emerging markets is 9.8 per cent — it serves as a reminder that the government has very limited space for fiscal measures to address the pandemic. It must continue to prioritise public health as the most effective mechanism for stimulating a recovery.