Disappointing numbers

Estimate of GDP growth for current year lowered

The National Statistics Office (NSO) on Monday released the second advance estimates of GDP for 2021-22, alongside the quarterly estimates for the third quarter of the year — October-December 2021. It estimates growth in GDP of 8.9 per cent for the current year, after a contraction of 6.6 per cent in 2020-21, the year that the pandemic and associated national lockdown hit economic activity. The figure of 8.9 per cent is lower than the 9.2 per cent growth that had been projected in the first advance estimates released early in January. It is unclear whether this decrease is a consequence of the effects on high-frequency indicators of the Omicron wave of the pandemic, which began to bite in India in January, or whether the rise in prices of commodities as a consequence of tensions in Eastern Europe has already been captured. If the latter is yet to have a full effect on the numbers, then the final numbers might be disappointing. Certainly, the nominal growth expected has been revised upwards even as real growth is lower than earlier, which means that some inflationary pressure has been baked into these estimates. At a quarterly level, growth slowed to 5.4 per cent year on year against 8.5 per cent in the earlier quarter, which is lower than the consensus forecast of economists polled by major news agencies. Thus even before Omicron began to hit, the growth momentum in the Indian economy had not been picking up. Future data prints will be affected by a base effect due to the timing of the devastating second wave in the first half of 2021. 
 

The disaggregated figures for sectoral growth are also being considered somewhat disappointing. Manufacturing is estimated to grow in the ongoing year at over 10 per cent, and mining at more than 12 per cent after a contraction of almost 9 per cent last year. Construction will also grow at 10 per cent after contracting by over 7 per cent in 2020-21. Yet high-frequency indicators had led some analysts to expect these figures to be somewhat higher. Manufacturing, for example, has not grown at all in the October-December quarter on a year-on-year basis, while the quarterly year-on-year numbers for construction showed a contraction. Crucially, the bounce-back in the trade, hospitality and communications sector has not been enough to make up for the losses of over 20 per cent in 2020-21, so that sector essentially still has not emerged from the pandemic contraction. Overall, growth in the two years since 2019-20 stands at just over 3 per cent. Even if trend growth in India was only 5 per cent per annum, the country stands to have lost about 7 per cent of GDP thanks to the pandemic as of now.

The government and the Reserve Bank of India, faced with these disappointing numbers, will also have to take into account the impact on commodities and especially the oil import bill of the Russian invasion of Ukraine. It might become necessary for the government to examine how much of this temporary increase in oil prices — and it will hopefully be only temporary — it can absorb with the fiscal room it provided for itself in the Union Budget. A spike in inflation would have complicated long-term consequences, and therefore extraordinary measures to manage it might be considered.