India’s economy needs a robust demand stimulus to avoid a protracted slump

The fact that India’s economy entered a technical recession in the July-September period has now been confirmed by National Statistical Office data. Provisional estimates of gross domestic product for the second quarter of the year ending in March 2021 show economic output shrank by 7.5%, following the 23.9% contraction in the first quarter. Not only has the economy shrunk for a second successive quarter, marking a recession for the first time in independent India’s history, but the overall GDP figure of ₹33,14,167 crore (at 2011-12 prices) reveals output has slid back to the lowest level in 12 quarters. This one fact alone ought to give cause for serious concern, notwithstanding the apparent improvement in economic momentum that helped narrow the contraction from the preceding period’s precipitous fall. Even there, a closer look at both the expenditure side and the gross value added across various industry categories leaves little room for comfort. Private consumption expenditure — the single biggest component propelling GDP with a share exceeding 50% at constant prices and edging toward 60% in current prices — continued to shrink albeit at a slower pace (-11.3%), reflecting both consumer wariness to spend amid the pandemic and the impact of lost jobs and reduced incomes. And, government consumption spending that was hitherto a bulwark and what kept the bottom from falling out in the first quarter when it grew 16%, contracted by 22% revealing the precarious state of public finances. Taken together, demand was largely missing.

And even though the contractions in gross fixed capital formation, exports and imports all narrowed, it was a puzzling almost fourfold growth in ‘discrepancies’ at ₹56,962 crore that limited the extent of decline in the overall GDP. In the real economy, electricity and other utility services joined agriculture in posting growth, expanding 4.4%, as the post-lockdown resumption of industrial activity lifted power and water consumption. Surprisingly, manufacturing GVA inexplicably jettisoned its correlation with official IIP data on the sector: while the latter had signalled an average contraction of 6.7% in the July-September period, GVA data from the NSO on Friday showed manufacturing rebounding to a marginal 0.6% expansion after a 39% collapse in the preceding quarter. One possible explanation for this uptick in provisional manufacturing GVA is that the year-earlier period had witnessed a contraction and the statistical effect of a low base coupled with inventory restocking likely lifted the figure. Financial, real estate and professional services, which contribute about a fourth of the GVA, widened contraction from the first quarter, shrinking 8.3%. Clearly, the financial services sector is not in good health and is an ominous portent for the economy given its crucial role in credit intermediation. The economy urgently needs a robust demand stimulus if a protracted slump is to be prevented.


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