After reporting two consecutive quarters of decline in GDP and GVA, India’s growth is back in positive territory in quarter ending December 2020 with GVA and GDP growth at 1% and 0.4% respectively. This is in sharp contrast to the situation in quarter ending June 2020 and September 2020 when GDP growth was (-) 22.2% and (-) 4.2% respectively. What explains the improvement?
Growth impulse is led by construction sector which reported an increase of 6.2% in the previous quarter after falling by 49.4% in quarter ending June 2020. The quantum shift can be better understood from the fact that in quarter ending December 2020, construction activity is more than twice the level seen in June 2020. Same goes for trade, hotels and transport. It too reported a 47.6% drop in quarter ending June 2020. While it still contracted by 7.7% in December 2020 because of lower occupancy seen in travel and tourism, it is more than 1.7 times the level seen in June 2020.
Manufacturing sector too has shown resilience with an increase of 1.6% in December 2020 as against a decline of 35.9% in quarter ending June 2020. In fact, industrial activity has shown a much broader normalisation as seen in improvement in non-oil exports, domestic GST collections and e-way bills. It is the services sector, which is yet to normalise. Services activities such as travel, education and healthcare are expected to normalise only once vaccination of a larger set of population is complete which will be towards the end of the year.
With services sector not yet fully functional, consumption spending — private and government — continues to trend lower. However, capital formation did turn around in the previous quarter. It has reported an increase of 2.6% and can be largely attributed to large capital spending undertaken by Centre and States. The focus of the Budget too has been to revive investments which have seen a secular decline in the last few years. If the trend sustains, which it should given the multitude of production linked incentive schemes started by the government, it will increase India’s potential output and thus provide non-inflationary growth momentum to the economy.
An investment driven growth will also lead to job creation and thus support private consumption. An uptick in consumption implies higher GST collections and more jobs imply higher income tax collections. Thus government revenues can again grow in-line with nominal GDP growth and thus give room to the government to reduce its fiscal deficit to 4.5% of GDP in FY26 from 9.5% of GDP this year.
CSO also revised the annual growth estimated for the financial year. The revised estimates have good news as well as bad news. The good news is that GVA growth has been revised upwards to (-) 6.2% in FY21 from (-) 7.2% earlier. This is a reflection of improvement in economic activity since October 2020. Now the bad news. GDP growth has been revised lower to (-) 8% from (-) 7.7% earlier. This adjustment can be explained by the higher subsidy burden since the difference between GVA and GDP is net taxes adjusted for subsidy payments. In the Union Budget, the Centre increased the subsidy payout to Rs 5.95 lakh crore in FY21 from Rs 2.28 lakh crore in FY20.
I believe, the uptake from the growth numbers is two-fold. One, we are growing again which is good. Second, we can’t achieve our potential unless we vaccinate fast enough.
The author is Chief Economist, Bank of Baroda