Cause for optimism?
While encouraging signs of recovery in manufacturing raise hopes of an overall revival of the Indian economy, the continuing decline of the service sector raises concerns
India is making a spirited effort to leave its vicious sickbed and start walking again. That is, going by the latest GDP figures released by the National Statistical Office. After a deep contraction of almost a quarter in April to June this year, the economy has shrunk far less drastically in the latest three months (July to September).
The NSO released its latest figures on the second-quarter performance figures which showed softening of the blow from the lock-down and suspension of economic activity to stave off the spread of infection. But the adverse impact is surely petering out.
In a technical sense though we are in a recession. Economists define a recession as a contraction of national income for two consecutive quarters.
While in the first quarter economy shrank by 24 per cent, in the latest quarter it contracted by 7 per cent. Thus although we are still in an economic slide, we can hope to get over the negative impact by the middle of next year if there is no drastic deterioration in disease spread. Professional economists and forecasters had incidentally projected a far deeper slide in the second quarter.
The surprising good news in the figures is really due to some sporadic improvements in select areas, rather than across the board recovery.
The first contributing factor is the recovery in the manufacturing sector. India's manufacturing has grown this quarter, though marginally against a huge fall in the previous quarter. The manufacturing sector grew by 0.6 per cent in July to September, against a contraction of 39 per cent in the previous quarter.
The second contributing factor is the continuing good performance of the farm sector. This has cushioned the slides elsewhere. The farm sector grew by 3.4 per cent in the second quarter. The farm sector had shown positive growth rate earlier as well, which indicated that this could now act as the engine of growth by infusing larger demand for a range of consumer products.
What is however a worrying feature is that the services sector, which accounts for the largest share in the GDP, has continued to remain muted. The services sector has continued to shrink by a hefty margin, according to the NSO estimates.
Overall, the services sector was smaller than the comparable period last year (July-September 2019) by over 15 per cent. Since the services sector constitutes close to 60 per cent of India's GDP, the performance of the sector is critical for the overall performance of the Indian economy.
But even there one can detect a silver lining if one does want to take a more nuanced view. The contraction in the services has been far lower than in the first quarter of the year, thus raising hopes that if the trend continues with further opening up of the economy, the services can give a major boost.
There are areas of concern as well. Some sectors of the economy, which are principal providers of employment have yet to show much recovery. Compensating the loss in employment during the lockdown period has thus been so far muted.
The GDP figures coming now are the basis for the budget preparatory exercises which should start shortly.
In other years, the first half figures by and large set the tone of the performance of the economy for the full year. But this year it is much more uncertain. Depending on the course of the disease, the economy would respond.
If the vaccines can starting rolling out by the end of the year, the spread of the disease could be arrested. The economy, which has been limping, would brace for a sprint. Even in the October-November period, early indications show greater normalisation of activities.
A few steps could be considered. The COVID-19 spread and suspension of normal activities had affected the poorest sections hardest. Union Government had provided some help to those worst affected by providing small income support. It might be advisable to continue and better these schemes. In fact, there are reports that some kind of universal basic scheme is being looked into. This might be helpful in maintaining overall demand.
Housing, construction and infrastructure building have the largest multiplier impact on creating demand for industrial intermediaries and for providing employment. The figures indicate some improvement in the construction sector in the sense that while in the first quarter construction shrank by over 50 per cent, in the second quarter construction shrank only by 8.6 per cent.
Some more temporary concessions and incentives to these activities could come in handy. Further easing of clearance formalities and sops for completion of housing projects might be useful in the revival of these areas which are vital for the creation of demand and employment.
Lastly, it will be advisable not to tamper the tax structure at this point of the recovery process. The Government should surely desist temptations of raising rates or imposing additional cess for mobilising more revenues. Such moves could be counter-productive.
Any overzealous concern for fiscal correctness might be reserved for another day. Pure deficit financing could be useful at this juncture when the economy needs further prodding.
It is believed that with good crop this year and rising rural demand, the industrial sector should continue to turn out a good performance and thus help rein fuse demand in the economy.
With that once the rigours of the lockdowns and needs for physical distancing get easier, the level of interaction should rise and the services sector should start its journey towards positive territory.
As of now, the full recovery of the services sector would help restore the rhythm of the economy and push it further forward.
Views expressed are personal