GDP numbers tell a story
The 20.1% Gross Domestic Product (GDP) growth for the first quarter of the fiscal year is lower than what was expected, not just by the Reserve Bank of India (RBI), which pegged it at 21.3%, but also private forecasters. A Bloomberg poll of economists put this number at 21%. To be sure, the number may have been higher if the second wave of Covid-19 had not disrupted the sequential recovery which was underway. GDP growth in the March quarter was 1.6%. The latest numbers increase the likelihood of 2021-22 GDP growth missing the RBI projection of 9.5%. The central bank’s Monetary Policy Committee (MPC) in its August resolution upwardly revised the June quarter numbers and reduced its growth projections for the remaining three quarters of the fiscal year. There are four key takeaways from these figures.
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One, to revive aggregate demand, the fiscal arm of policymaking needs to get its act together. Not only is the government not spending enough, but it is also squeezing demand by a high indirect tax burden on petroleum products. While those who bat for the current, conservative stance cite the need to keep the fiscal deficit in check, it cannot come at the cost of sacrificing growth and, more importantly, well-being of citizens. A fiscal boost needs to be timed with the festive season. Two, both the GDP numbers and this newspaper’s analysis of corporate results for the June quarter point towards the “have-nots” (informal sector workers and smaller sized firms) suffering disproportionately due to the pandemic. If left unchecked, this will lead to long-term destruction of mass incomes. To address this, policymakers must consider institutionalising some kind of a progressive mechanism – which helps the smaller players in the economy.
Three, it is important that policy attention is not swayed by the ongoing bull run in the equity markets. Both Sensex and Nifty reached new highs on August 31. With the Federal Reserve ruling out rake hikes this year, the party might continue in the foreseeable future. Buoyant stock markets are good for investor confidence, foreign exchange inflows and wealth creation, but they do very little to boost the macro economy. Also, investments in the macro economy are much more likely to bear fruits in the long run than stock markets, which at the moment, are not just overvalued but also enjoying external tailwinds, which will eventually ebb. And finally, India must maintain the current momentum in its vaccination drive — which is the key to preventing a third wave and restoring economic normalcy.