The latest GDP and GVA estimates from the National Statistical Office have affirmed that the economy is now on the path to recovery after last fiscal’s record contraction. Second quarter gross domestic product expanded 8.4% , rebounding from the year-earlier period’s 7.4% contraction . While the statistical advantage from the base effect surely aided the expansion, the economy appears to have gathered just enough momentum for GDP to post a marginal 0.3% growth even when compared with the second quarter of the pre-pandemic 2019-20 fiscal year. The gross value added figures, which capture the extent of activity across the eight major formal sectors of the real economy, too underscore the improvement, with the July-September 2021 GVA figure of ₹32.89-lakh crore registering a 0.5% expansion from the July-September period of 2019. Five of the eight sectors posted growth not just from the year-earlier quarter but also surpassed the pre-COVID-19 performance. Manufacturing, which has the second-largest share of GVA, appears to have regained traction and was the bulwark of GVA, logging a 3.9% expansion from the pre-pandemic second quarter of fiscal 2020. The key employment-providing services categories, however, are yet to fully recover from the pandemic’s devastating impact, and along with construction, another major provider of jobs, lagged pre-pandemic levels by a cumulative ₹77,000 crore. With the potential impact of the Omicron variant a big unknown, the outlook here may stay hazy for now.
A disaggregated view of the GDP data also reveals areas of concern that could undermine the recovery. Private final consumption expenditure that measures spending on everything from essentials to luxury goods and the entire gamut of services by all consumers, and has the largest share of GDP at 55%, is still treading water. The uncertainty induced by the pandemic, coupled with reduced or lost incomes, continues to depress demand and is mirrored in consumer spending still remaining 3.5% shy of the pre-COVID level. Government consumption spending, which has often been a reliable alternative source of demand with a capacity to serve as a multiplier, is also well below the fiscal 2020 second quarter, possibly by design as the Centre seeks to consolidate its fiscal position. Unless aggregate demand strengthens, the heartening uptick in business investment, as reflected in the 11% year-on-year jump in gross fixed capital formation, could come to naught with capacity additions remaining underutilised and corporate captains yet again tightening their purse strings. Manufacturing PMI data by IHS Markit has another salutary warning: rising input costs could force manufacturers to raise prices adding to the general inflationary pressures in the economy and undermine the recovery. Policy makers need to ramp up demand-supportive measures including increasing government spending to ensure that the recovery sustains and gains traction.