Demand-side measures needed now

The provisional estimate of GDP for the second quarter of the fiscal has confirmed that the economy is in recession for the first time since Independence. The economy shrank by 7.5%, following a 23.9% contraction in the first quarter. The contraction was forecast to be about 8%, but the head of the Niti Aayog found a “pleasant surprise” that it has done better by 0.5%. At Rs 33,14,167 crore, the economic output is the lowest in the last three years. It is not yet certain that the smaller-than-expected decline is the sign of a better-than-expected recovery in the coming months. There are predictions that the current quarter and the next quarter would keep up the momentum, but it is not yet time to entertain any firm hopes in that respect.

There are some factors that call for caution in the assessment of the second quarter figures. A 0.6% growth in the manufacturing sector was the most positive of all the pointers. But this was expansion from a very low base, as in the preceding quarter there was a collapse of about 39%. Growth in the corresponding period of the last fiscal was also low. While the manufacturing data showed an improvement, the IIP data actually showed a decline. It is possible that a good part of the momentum was accounted for by pent-up and festive demand, but it is unlikely that it will be sustained. There are already signs of that. There is also a possibility that the figures released by the National Statistical Office (NSO) are not final. If they are revised, the figures could only be lower, especially because they haven’t yet taken into consideration the state of the unorganised sector, which has a crucial role in the economy.

Private consumption expenditure, which is the largest component of GDP, has continued to fall during the quarter, and that is not a sign of revival. Consumers are not spending money on goods and services for various reasons. The pandemic has reduced spending options, and incomes have fallen for many people. Government consumption has declined sharply, as much as by 22%. There are uncertainties about how the pandemic will pan out. Though the situation is said to be easing in the country now, a resurgence of the virus, as it has happened in other countries, cannot be ruled out. One important message from the figures is that there is a need for a major fiscal stimulus as the earlier packages have been inadequate and perhaps misdirected. The government should find ways to spend itself as well as to create demand in the economy.