Covid didn’t crush it gdp wasn’t bruised badly by second wave but q1 data shows economy below 2019 level boost demand

Covid didn’t crush it gdp wasn’t bruised badly by second wave but q1 data shows economy below 2019 level boost demand

The Indian economy weathered the surge in Covid cases during the second wave quite well and GDP during the April-June quarter grew 20.1%. To place it in context, the corresponding period last year saw GDP shrink by 24.4% because of a tight nationwide lockdown that crippled the economy. This year, however, localised lockdowns minimised dislocation. Consequently, all segments, particularly construction and manufacturing, recorded high growth rates. Construction grew 68.3% and manufacturing by 49.6%.

A measure of the likely cost of the second wave is the difference between RBI’s forecast in early April and the data released yesterday. In early April, RBI forecast GDP growth of 26.2% in the April-June quarter, about six percentage points higher than the final result. Consequently, GDP in April-June is still lower than that recorded in the corresponding period of the pre-pandemic year, 2019. Aggregate demand continues to be lacklustre. Private consumption was Rs 17.83 lakh crore, higher by 19.34% from April-June 2020, but lagging the overall growth rate. On the other hand, the growth in fixed investment was huge, up by 55.31% to Rs 10.22 lakh crore as GoI is pushing ahead with its projects.

The puzzle however is the fiscal stance of GoI. Expenditure is on a tight leash in the midst of an economic shock. To illustrate, revenue and fiscal deficits are generally over 100% of the annual target around this phase as spending is frontloaded. This year, however, they were 15-18% of the annual target till end-July. Consequently, fiscal and monetary policies are not in sync. Quarterly GDP data tends to underestimate the hit to the informal sector during a shock. Even with current activity indices showing the return to normalcy, GoI may need to use the fiscal space to provide targeted support. The key takeaway though is that stringent national lockdowns should be avoided.