The quarterly estimates released last week showed that in the second quarter of the current fiscal, India’s Gross Domestic Product (GDP) had contracted by 7.5% over the corresponding period last year, while Gross Value Added (GVA) declined by 7%. Coming as they did after a 23.9% contraction of GDP and a 22.8% contraction of GVA in the first quarter, the second quarter numbers are being seen as signs of economic revival.
However, the question that must be asked is whether these numbers are good enough not just from the point of view of sustaining this uptick, but perhaps more importantly, to overcome the main structural bottleneck that the economy has been facing even prior to the onset of the pandemic—namely the demand deficiency.
In terms of the sectoral composition of GVA, agriculture maintained its robust growth of 3.4%, as it had done in the first quarter. Interestingly, this is the first time since 2007-08, when the erstwhile Central Statistical Organisation began releasing the quarterly GDP numbers, that Indian agriculture has grown above 3% in the first two quarters for three consecutive years. This could be an indication that the sector has overcome its low growth barrier.
The manufacturing sector is shown to have expanded by 0.6% in the second quarter, overcoming the 39.3% decline in the first. However, the second quarter estimate is in sharp contrast to that obtained from the Index of Industrial Production (IIP) for the same period, which showed a 6.7% contraction as compared to July-September of 2019. Of course, IIP has shown that the manufacturing sector performance has consistently improved; in September 2020, it declined by only 0.6% over the corresponding month in 2019, after falling by over 11% in July 2020.
The other area of improvement was that major sub-sectors, especially motor vehicles and electrical equipment, had rebounded into positive territory, after registering contraction of 31% and 24%, respectively in July 2020. However, some of the labour intensive sectors including textiles and apparels are still deeply in the red. Two questions arise from the numbers provided by two arms of the NSO on the performance of the manufacturing sector.
First, what explains the differences between the GVA estimates and those of the IIP? And secondly, was the informal sector included in the second quarter estimates? The answers to both these questions would have enabled a better assessment of the performance of the manufacturing sector. Another factor that indicates that the optimism regarding the sustained recovery of manufacturing may be a bit premature is the RBI’s Industrial Outlook Survey of the Manufacturing Sector for the second quarter. This shows that the actual responses of the industry on survey parameters were lower than expectations; in other words, the industry has performed below expectations during July-September 2020.
The estimates of GDP and its components show that several pain points are persisting. Private final consumption expenditure (PFCE) continues to be an area of concern; in the second quarter, it had declined by 11.3%, after a 27% drop in the first. Further, as a share of GDP, PFCE is at the lowest level since the days of demonetisation. This should be a major concern as even after the economy has been unlocked, consumer demand has remained subdued.
Investment rate has shown an improvement, but this is illusory since in the second quarter of 2019, investment was already on a low keel. We will, therefore, have to wait until the next quarter to see if this important growth driver has shown any real improvement, and, therefore, better augury for the growth prospects of the economy.
The government final consumption expenditure has dropped to 10.9% of GDP; in real terms, this figure was at its lowest since the second quarter of 2016-17. In the past, this quarter has seen the highest level of government spending, and the compression of government spending that has just been seen implies that this instrumentality could become even less important as the government has ruled out additional borrowing, despite the fact that its finances are looking very dismal.
At the end of October, revenue receipts were a mere 34% of the budget estimates, while fiscal deficit was nearly 120% the budgeted figure. Prospects for the economy do not look encouraging, particularly because the labour market continues to reel under the impact of the slowdown, and agriculture, the star performer in the current fiscal, is embroiled in the farmers’ unrest.
Labour market conditions as reported by the Centre for Monitoring Indian Economy are looking downbeat. In the week ending November 22, the unemployment rate was almost at a touching distance of 8%, but more worryingly, the labour force participation rate had plunged to 39.3%. These are tell-tale signs that the economy is facing a serious demand crunch, which is unlikely to improve quickly as the government is in a mood to exercise fiscal prudence.
Biswajit Dhar (bisjit@gmail.com)
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU