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Optimism unbounded: On signs of an economic recovery

Optimism unbounded: On signs of an economic recovery

NSO projections of GDP seem overly optimistic even as the economy rebounds

The first advanced estimates of economic output for the current financial year posit a picture of an economy rebounding robustly in the second half from the pandemic-induced slump of the preceding two quarters. The National Statistical Office on Thursday projected that GDP in the 12 months ending March would total almost ₹134.4-lakh crore in constant prices, reflecting a 7.7% contraction from the preceding year’s figure. To reach that level, the NSO has assumed that output will recover vigorously in the third and fourth quarters. After contracting by almost 16% in the April-September period, it sees GDP being just a mere ₹10,400 crore short of the year-earlier second half’s figure. It is this mathematical projection that is hard to square with the economic reality revealed in both the NSO’s more detailed sectoral output forecasts as well as other emerging trends from ground-level activity. Both the expenditure side and gross value added (GVA) across various industries point to the high degree of optimism implicit in the NSO’s assumptions. Private consumption expenditure — the single biggest component propelling GDP, at well over 50% — is estimated to shrink 9.5% in the full year, after contracting nearly 19% in the first half. This presupposes that consumers have largely shed their wariness to spend in the face of COVID-19 and have begun to set about consuming goods and services at close to pre-pandemic levels, the dampening impact of lost jobs and reduced incomes notwithstanding. GVA data for manufacturing and services, however, seem to belie this postulation.

While the NSO expects manufacturing to shrink 9.4% this fiscal, albeit narrowing from an almost 20% contraction in the first half, it sees the crucial GVA services component of trade, hotels, transport, communication and broadcasting contracting 21.4% (the most among all the GVA constituents) over the 12-month period. Clearly, with the mandated social distancing norms having taken the highest toll on high-risk indoor activities, it is this omnibus services sector which contributes almost a fifth to overall GVA that is bearing the brunt of the pandemic-related restrictions. The forecast for government spending also appears far too upbeat. The NSO sees government final consumption expenditure (GFCE) jumping 17% in the second half, erasing the first-half’s contraction and buoying the annual figure to a growth of 5.8%. The end-November fiscal deficit data show the government lagging well behind its budgeted revenue and capital expenditure targets, and with just four months to go and revenue receipts continuing to underwhelm, it is hard to fathom how the GFCE can increase so appreciably in the second half. True, the NSO has furnished a caveat that its estimates are likely to undergo sharp revisions. The upcoming Economic Survey could move away from these overly optimistic assumptions with a more sober assessment of the economy.

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