Context

The April-June quarter GDP numbers indicated at 20.1 per cent growth.

Making sense of the numbers

• The higher GDP growth was driven by high indirect tax collections, largely GST.
• The more representative measure of economic activity, gross value added (GVA), grew by 18.8 per cent.
• GDP is derived by adding indirect tax collections, net of subsidy payouts, to GVA.
• These numbers are over a base quarter that had contracted sharply due to the lockdowns during the first Covid wave last year.
• The revival of manufacturing GVA was the most robust, with mining and electricity growth somewhat moderate.
• The overall and sector-specific activity levels need to be evaluated vis-à-vis the corresponding thresholds of (the pre-pandemic) first quarter of 2019-20.
• Agriculture grew at 4.5 per cent, with cereals, pulses and oilseeds output at all-time highs.
• As could be expected, the services sector remained vulnerable, with activity even softer than expected.
• Steel and cement output growth — proxies for construction activity — were also quite robust in the quarter.
• Demand and expenditure: Private consumption was up 19.3 per cent while investment was at 55.3 per cent.
• Government consumption was lower by 4.8 per cent.
• Export: Net exports are typically in deficit, but the gap was much lower in the first quarter.

How to sustain recovery: way forward

• Looking beyond the first quarter, the set of high-frequency economic signals suggest a strong recovery in July and August.
•  But, how can this recovery over the rest of the year and beyond be sustained, and even accelerated?
• Sustaining 3 growth drivers: The three distinct potential growth drivers — consumption, investment and exports — will need to be effectively sustained by policy initiatives over the next couple of years.
• Government spending: Centre’s revenues and expenditures during April-July this year suggest that it has significant room to increase spending.
• National Monetisation Plan will open up further fiscal space to increase spending, in particular, on capex.
• Credit support to stressed segment: mid-and small-sized enterprises will take some time to restore their pre-pandemic operational levels.
• An increase in the flow of credit, from banks, NBFCs and markets, particularly to these stressed segments, is a priority, as a supplement to state spending.
• Opportunity for exports: Global inventories are low and depending on the progression of the pandemic relaxations across geographies, are likely to provide opportunities for Indian exports to fill some of these gaps.
• Reforms: Multiple reform initiatives, tax and other incentives are in the process of implementation.
• These need to be accelerated in coordination with states to enable an environment of steady, high growth in the medium term.

Challenges

• Global central banks’ are signalling the imminent normalisation of ultra-loose monetary policy.
• The resulting increase in financial sector volatility will have spillover effects on emerging markets, including India.
• To keep the process smooth, it is crucial to raise India’s potential growth so that the economic recovery does not rapidly close the output gap, thereby preventing a surge in inflationary pressures.

Conclusion

There is a limited window of opportunity for India to leverage the current ongoing realignment of global supply chains and progressively onboard both manufacturing and services entities.

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