The economy is recovering
India’s Gross Domestic Product (GDP) grew at a higher than expected 8.4% in the quarter ending September. The biggest takeaway from this is that the second wave’s disruption did not derail the sequential recovery which started in the second half of the last fiscal year. While economic policy has played a role, the contribution of a successful pick up in India’s vaccination campaign — on the epidemic and psychological front — cannot be overestimated. This also underscores the importance of fully vaccinating all adults as soon as possible. It’s now December and the economic momentum in the September quarter numbers seems to be continuing. High-frequency indicators such as the Nomura India Business Resumption Index, Purchasing Managers’ Index, and the core sector growth numbers, point to this. That the government has prioritised capital spending has also played a role in this recovery. It is investment and exports, not domestic consumption, which has catapulted the September GDP beyond its pre-pandemic value.
While the economy reaching pre-pandemic levels was a challenge, the glass is only half full. Policy focus should now be recalibrated towards the task of making sure that the pandemic’s scars do not inflict long-term damage on the Indian economy’s growth prospects. There are enough red flags: Private consumption is lagging, which suggests that mass incomes have not revived and the ongoing recovery might have been driven by the rich. Periodic Labour Force Survey data for the March 2021 quarter — the economy was doing well in this period before the second wave hit — shows that while unemployment rates have come down, the quality of jobs might have taken a hit. These statistics, when read with the fact that the International Monetary Fund’s October World Economic Outlook downgraded India’s potential GDP growth from 6.25% to 6%, call for a forward-looking holistic policy intervention.
This newspaper has consistently argued that a fiscal policy boost is essential to boost incomes of the poor, and therefore, mass demand. The encouraging trend in headline GDP numbers does not mean that such an intervention is not needed anymore. In fact, the imminent squeeze on farm incomes because of food inflation lagging its non-food counterpart only strengthens the case for a fiscal boost to rural incomes. The State has done well to extend the free ration scheme till March. To summarise, the Indian economy is getting on its feet, but it still needs careful healing to start running like it used to.