Undoing the damage

Second wave disrupted economic momentum of fourth quarter. Recovery to pre-Covid levels depends on vaccination drive.

The normalisation of economic activities, which had begun to gain traction in the third quarter (October-December) of the last financial year, gathered momentum in the fourth quarter (January-March). According to data from the National Statistical Office, gross domestic product (GDP) grew by 1.6 per cent in the fourth quarter of 2020-21, up from 0.5 per cent in the quarter before. Gross value added, a better indicator of economic activity considering that GDP growth is being distorted by the back-ended release of the government’s subsidy payments, grew by an even higher 3.7 per cent in the fourth quarter — indicating that the economy had surpassed pre-Covid levels in the second half of the year. For the full year, the NSO has now pegged the contraction at 7.3 per cent, lower than its earlier expectation of a 8 per cent decline.

The stronger than expected performance in the fourth quarter was driven by a larger than expected pick-up in construction and manufacturing. The construction sector grew by a robust 14.5 per cent, while manufacturing activity rebounded by 6.9 per cent. While directionally not a surprise, this upswing is higher than was anticipated. Worryingly, however, trade, hotels, transport, communication and services continued to contract, though the pace of decline appears to have moderated. Private consumption rebounded mildly after contracting for three straight quarters, while both investment activity and government spending picked up pace — the latter benefiting from higher subsidy payments. The Centre’s subsidy payments have exceeded its revised estimates by a staggering Rs 1 lakh crore.

The glimmer of good news in the fourth quarter notwithstanding, there is cause for concern. First, the recovery observed in the corporate sector seems to be driven largely by the bigger corporates, with the smaller companies continuing to struggle. Second, these quarterly numbers do not present an accurate portrayal of the informal economy which is likely to have fared worse. How the smaller companies and the informal economy fare will have a bearing on the employment prospects, and the durability of the recovery. Third, the second wave of the pandemic and the consequent restrictions on activities imposed by state governments have disrupted this momentum in the economic activities in the period thereafter. While the disruption isn’t as severe as last year, sequentially, there appears to be a sharp dip in activities. But as the base effect will distort numbers, one must be cautious in interpreting the data as the year-on-year numbers will still look good. Even though new infections have fallen considerably over the past few days, the economic outlook continues to look uncertain. How quickly economic activities bounce back to levels before the second wave will depend on the trajectory of the pandemic, the timelines for the rollback of the localised restrictions imposed by states governments, and the pace of the vaccination drive.

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