Monday, Sep 20, 2021 10:45 [IST]
Last Update: Monday, Sep 20, 2021 05:08 [IST]
The Covid-19 outbreak and stringent lockdowns over the last 18 months made the Indian economy contract for the first time in more than 40 years. But despite a devastating second wave in April, the economy has since shown signs of improvement, partly driven by increased demand for Indian products, which has led to growth in exports and factory output.
Business activity has largely recovered to pre-pandemic levels, but the challenge is to maintain that trajectory. And while the supply of most goods has stabilized, economic growth can only be sustained if consumer demand grows considerably.
The official estimates of India’s gross domestic product (GDP) for the first quarter (Q1) of 2021-22, together with other recent information, enable us to form a fairly comprehensive picture of how India is doing and the outlook going forward on different aspects of the economy: growth, employment, inflation, investment, trade, and so on.
The second wave of Covid was four times worse than the first wave in terms of peak levels of new daily cases and daily deaths. There was great concern about how it would impact economic activity. Hence, the high 20.1% growth registered during Q1 of 2021-22 brought great cheer all around. The high growth was no doubt helped by the absence of a stringent, nationwide lockdown as seen during the first wave. However, it largely reflected the base effect of the unprecedented 24.4% contraction during Q1 of 2020-21. The level of Q1 GDP in 2021-22 at ?32 trillion was still nearly ?4 trillion less than the ?36 trillion GDP registered during Q1 of 2019-20, the last normal year before the pandemic.
Since the contraction itself was reduced during the second, third and fourth quarters of 2020-21, the base effect will also be weaker in these quarters. Hence the year-on-year growth may be progressively lower during the next three quarters. By the end of the year, India’s GDP for 2021-22 will probably have just caught up with the 2019-20 level, with two years lost to the pandemic. If the Reserve Bank of India’s (RBI) forecast of 9.5% growth in 2021-22 turns out to be correct, the level of output might even be a little higher than it was in 2019-20. But that assumes no major adverse impact of a third covid wave, an optimistic assumption.
Underlying the aggregate Q1 growth rates, there are significant inter-sectoral variations. Agriculture was not much affected by the pandemic. It grew by 3.5% during Q1 last year and 4.5% in Q1 this year. With the rainfall deficit more or less made up by now, we can expect a normal rabi harvest and annual agricultural growth of around 4%. In industry, all sub-sectors registered very high growth during Q1, led by manufacturing and construction. However, the high growth rates again largely reflected the strong base effect of the huge contraction during Q1 of 2020-21. The contraction was also very large in services, but less than in industry, hence the base effect in 2021-22 is also weaker. The output level of the services-sector is trailing well behind that of 2019-20’s Q1, mainly on account of a shortfall of ?2 trillion compared to Q1 of 2019-20 in the sub-sector ‘trade, hotels, transport, communications & broadcasting’ (THTC).
India’s growth outlook going forward will depend on some key drivers. A further lift in the economic activity is likely as the festive season kicks in. The main key will be to monitor Covid-19 developments and increase the pace of vaccinations.