As the nation got into the ‘unlock’ mode, it was expected that growth in its gross domestic product (GDP) would improve sequentially, so the September-quarter contraction rate of 7.5 per cent does not come as a surprise, though it is better than our expectation of 9.9 per cent. The buzz around high growth in sales in the consumer segment during the festival-cum-harvest season has had its mirror image partly in the production numbers of September, as companies prepared for the same. Hence, the December quarter would be the test for sustenance of the revival seen in the last few months.
What do these quarterly numbers indicate? The first is that growth rates in all segments are better than they were in Q1, and there are strong chances of further improvement in Q3, with a possibility of positive growth in Q4. In fact, positive growth in manufacturing and electricity is the surprise element which can be related to the higher profit growth witnessed by corporates in Q2.
Second, the growth number for public administration and other services continues to be negative and this can be attributed more to the pattern of government expenditure where there was concentration in transfer payments in the form of free food and employment generation. The promise of higher capex made by the FM in the last months or so would get reflected in the next two quarters.
Third, the negative growth in consumption (-7.7 per cent) was again expected but shows improvement over last quarter. As the economy was unlocked gradually access to all physical products was open by September while services were generally closed and were opened in a discernible manner only post October. Consumption should progressively show improvement though the pace is uncertain.
Fourth, investment remains low at 25.7 per cent this quarter too though higher than Q1 which was 19.5 per cent and the concern is that this trend though understandable for this quarter has been coming down for the last few years. This is probably the biggest challenge for the country as it seeks to reach the size of $5 trillion in nominal GDP. Investment has the accelerator effect in terms of generating growth. However, with private investment being fairly lackluster even in the pre-covid times, there has to be special effort put to reverse this trend.
It may be expected that the reversal of this process will gain some momentum in the third and fourth quarters and for this several things have to fall in place. First, the government should not be cutting on expenses in order to meet a fiscal target as the budgeted number of 3.5 per cent is anyway not attainable. Second, states too should focus on capex in the next four months to add to the investment demand. Three, with the momentum seen in spending this festival season, it should have hopefully brought in the correction from Q1. This is essential to keep the spending cycle moving. These three pieces falling in place could help to revive private investment too.
The next thing to look out for would be the RBI policy next week which would be focused more on the development front and provide official direction to growth prospects changes if any. Rate cuts can be ruled out given the prevalence of high inflation. The Budget would be the next big announcement in February and would be dependent on how the vaccine has progressed in the world as one can expect significant thrust on the health sector in terms of expenditure to ensure a safe environment next year. The call on the fiscal deficit level will hence be important.
While the country is now technically in a recession with two successive quarters of negative growth, it should not be worrisome as this is the case across the globe with China being the only exception. But what is a concern is that growth had started slowing down even before the pandemic as we have not been able to attack the twin issues of job creation which affects consumption and private investment which shows a downward tendency. This has to change.
The author is chief economist at CARE Ratings and author of Hits and Misses: The Indian Banking story, to be published in December by SAGE