Two years lost

Private consumption continues to remain weak

The National Statistics Office has released its estimates of gross domestic product (GDP) for the second quarter this fiscal year, 2021-22. The quarter, which covers the months between July and September 2021, saw GDP at constant prices rise 8.4 per cent as compared to the equivalent period in 2020. However, comparison with the year-ago quarter may not be completely appropriate, since that was when the economy was going through the painful unlocking process after the extensive national lockdown introduced to respond to the onset of the Covid-19 pandemic. When compared to the July-September quarter two years ago, the figures for the current fiscal year show a growth rate of only 0.3 per cent or so. This barely perceptible growth shows the extensive scarring caused by the pandemic.

The question is what the data reveals about growth momentum. One important data point is the figure for private final consumption expenditure, which is still 3.5 per cent lower than in the equivalent quarter for the pre-pandemic year of 2019-20. This suggests that the overall recovery masks the continuing weakness in private consumption. There are two ways of looking at this question. What is likely is that a weakness in private consumption due to the shock of the pandemic, ongoing wealth effects, and subdued sentiment will act as a drag on future investment and growth. Certainly, the government cannot continue to finance a recovery. Its own fiscal mathematics is growing complicated in the absence of private demand. While tax revenues have been buoyant, possibly thanks to inflationary pressure pushing up nominal growth, the Union Budget’s forecasts were predicated on a large mop-up from disinvestment. This is, as expected, proving difficult to achieve. Given the likely constraints on government finances, therefore, private consumption will have to shoulder its share of the recovery burden. The other way of looking at the question, therefore, is that, if consumer sentiment does in fact revive, there is considerable room for recovery and growth in the economy.
 

Much will depend upon the path of inflation, as growth in inflation expectations will limit the possibilities available to the monetary authorities to support growth and will also have a constraining effect on private consumption demand. Some indication of the path of demand in the economy will have to wait for the ongoing quarter’s numbers, since the festive season may provide some much-needed momentum to expenditure. But the real test will come beyond that. It is to be hoped that a private consumption malaise does not set in, matching the long-running stagnation in private investment. Additional risks also exist: Commodity prices face an uncertain future, with energy supply pressures, in particular, building up. And the discovery of the omicron variant of coronavirus might put pressure on not just India but other economies, depressing export demand as a component of growth. Further chaos in supply chains will also add to inflationary pressures and overall uncertainty. Thus, it is clear that India is far from out of the woods yet as far as the pandemic macro-economic shock is concerned. At least two years’ worth of growth has been lost. But without swift and responsible policy action, it might be even more.