In the midst of the raging second wave of Covid infections came the rather unwelcome news from the National Statistics Office (NSO) that the pandemic had caused the Indian economy to decline by 7.3 per cent in FY21, the lowest ever registered since Independence. The only redeeming aspect of this economic performance was that until a few months ago, the contraction was expected to be closer to 8 per cent. It was the better-than-expected performance of the economy in Q4, of 1.6 per cent, that helped in improving our performance in the previous fiscal. How do we read the numbers presented by the NSO, and what do these mean for the Indian economy going forward?
At the outset, it would be useful to consider the areas in which the Indian economy performed relatively better in Q4. In three sectors, Q4 numbers were significantly better than those recorded in the previous quarters. The manufacturing sector grew by almost 7 per cent over the corresponding period in 2019-20, while electricity, gas, water supply and other utility services recorded a 9 per cent growth. Construction was the best performing sector, having expanded by 14 per cent . But while these sectors recorded their highest quarterly growth rates in Q4, agriculture, the only sector to have kept itself away from the gloom, expanded by just 3.1 per cent, the slowest growth across quarters during the financial year just gone by.
Some words of caution need to be added while interpreting the sectoral growth numbers, especially for the three “better” performing sectors mentioned above. All these sectors had performed poorly in Q4 of 2019-20, and therefore the so-called “base effect” had influenced the NSO’s latest set of numbers. This was particularly true for manufacturing, which had contracted by over 4 per cent in the closing quarter of the previous financial year due to a steep fall in output of close to 23 per cent in March 2020. The contraction was partly due to the impact of the lockdown announced in the last week of the month, but it was also due to the structural infirmities besetting India’s manufacturing that had caused this sector to contract in three quarters during 2019-20. It was in response to the falling fortunes of the manufacturing industries that the government had decided to take an important step for their revival through the Production Linked Incentive (PLI) Scheme. With regards to agriculture, while there is no assessment on whether the ongoing farmers’ agitation has had any impact on the growth performance of the sector, it may be difficult to argue that this development has left India’s farms untouched.
Appropriate policy measures like the PLI Scheme can go a long way in improving the supply side constraints, but these may turn out to be less than adequate if the demand side continues to remain sluggish. The Indian economy is consumption-led, with private final consumption expenditure (PFCE) enjoying a share of 57-58 per cent of the GDP in recent decades. However, since 2017-18, the annual growth of PFCE had declined from 7 per cent to 5.5 per cent, and with consumers demanding less, most sectors faced uncertainties even before the pandemic-induced crisis had set in. The across-the-board impact of the Covid crisis on livelihoods had seriously impacted PFCE during the previous fiscal, resulting in its decline by 9.1 per cent and reducing its share in the GDP to 56 per cent, the lowest ever.
Is the demand side likely to bounce back anytime soon? Not likely, if the job market numbers provided by the CMIE and the Consumer Confidence Survey of the Reserve Bank of India (RBI) are considered. According to the CMIE, the unemployment rate was 14.7 per cent in the third week of May and it was the first time since the lockdown in 2020 that it was in double digits. More worrying was that labour force participation had virtually stagnated at 40 per cent, indicating the deep catharsis in the labour market. Moreover, the RBI’s bi-monthly Consumer Confidence Survey has been reporting that consumer sentiments have consistently remained downbeat. In the latest survey for May 2021, a majority reported that their expectation was that the economy will worsen one year ahead, while nearly half felt that the employment situation will worsen.
With domestic demand unlikely to recover soon, can exports provide the growth trigger for the Indian economy? This is distinctly possible as most of the major economies are well on their way towards recovery. But then, the government and business must work on ways to facilitate exports, including through improving the efficiencies of Indian industry, thus enabling it to increase its footprint in global markets.
Biswajit Dhar
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU
(bisjit@gmail.com)