From UPSC perspective, the following things are important :
Prelims level : GVA and GDP
Mains level : Paper 3- How to sustain economic recovery
The April-June quarter GDP numbers indicated at 20.1 per cent growth.
Making sense of the numbers
- The higher GDP growth was driven by high indirect tax collections, largely GST.
- The more representative measure of economic activity, gross value added (GVA), grew by 18.8 per cent.
- GDP is derived by adding indirect tax collections, net of subsidy payouts, to GVA.
- These numbers are over a base quarter that had contracted sharply due to the lockdowns during the first Covid wave last year.
- The revival of manufacturing GVA was the most robust, with mining and electricity growth somewhat moderate.
- The overall and sector-specific activity levels need to be evaluated vis-à-vis the corresponding thresholds of (the pre-pandemic) first quarter of 2019-20.
- Agriculture grew at 4.5 per cent, with cereals, pulses and oilseeds output at all-time highs.
- As could be expected, the services sector remained vulnerable, with activity even softer than expected.
- Steel and cement output growth — proxies for construction activity — were also quite robust in the quarter.
- Demand and expenditure: Private consumption was up 19.3 per cent while investment was at 55.3 per cent.
- Government consumption was lower by 4.8 per cent.
- Export: Net exports are typically in deficit, but the gap was much lower in the first quarter.
How to sustain recovery: way forward
- Looking beyond the first quarter, the set of high-frequency economic signals suggest a strong recovery in July and August.
- But, how can this recovery over the rest of the year and beyond be sustained, and even accelerated?
- Sustaining 3 growth drivers: The three distinct potential growth drivers — consumption, investment and exports — will need to be effectively sustained by policy initiatives over the next couple of years.
- Government spending: Centre’s revenues and expenditures during April-July this year suggest that it has significant room to increase spending.
- National Monetisation Plan will open up further fiscal space to increase spending, in particular, on capex.
- Credit support to stressed segment: mid-and small-sized enterprises will take some time to restore their pre-pandemic operational levels.
- An increase in the flow of credit, from banks, NBFCs and markets, particularly to these stressed segments, is a priority, as a supplement to state spending.
- Opportunity for exports: Global inventories are low and depending on the progression of the pandemic relaxations across geographies, are likely to provide opportunities for Indian exports to fill some of these gaps.
- Reforms: Multiple reform initiatives, tax and other incentives are in the process of implementation.
- These need to be accelerated in coordination with states to enable an environment of steady, high growth in the medium term.
- Global central banks’ are signalling the imminent normalisation of ultra-loose monetary policy.
- The resulting increase in financial sector volatility will have spillover effects on emerging markets, including India.
- To keep the process smooth, it is crucial to raise India’s potential growth so that the economic recovery does not rapidly close the output gap, thereby preventing a surge in inflationary pressures.
There is a limited window of opportunity for India to leverage the current ongoing realignment of global supply chains and progressively onboard both manufacturing and services entities.