Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Need for avoiding misplaced optimism over economic recovery


From UPSC perspective, the following things are important :

Prelims level: GDP

Mains level: Paper 3- Recovery of Indian economy and the issue of fiscal conservatism

Overoptimism stemming from the signs of recovery shown by the figures for the second quarter could result in reduced spending and the rollback of the stimulus. However, other features indicate that fiscal conservatism at this moment is not a good idea.

Hype over recovery

  •  India’s economy contracted by 7.5% in the second quarter of financial year 2020-21.
  • There are two ways to look at that figure:-
  • 1) That figure is far lower than the 23.9% contraction registered in the first quarter of this financial year.
  • 2) A 7.5% second quarter contraction is high both in itself and when compared with most similarly placed countries.
  • The government, however, has chosen to focus on the unsurprising evidence that GDP rose sharply, by 23%, between the first quarter and the second when restrictions were substantially lifted.
  • Based on that evidence, the Finance Ministry’s Monthly Economic Report, for November, speaks of a V-shaped recovery reflective of “the resilience and robustness of the Indian economy”.
  • The danger is that such optimism would provide the justification to avoid adoption of the measures crucially needed to pull the economy out of recession.

India economy is still demand constrained: 3 signs

  • 1) The decline in private final consumption expenditure at constant prices, which accounts for 56% of GDP, has come down from minus 27% in the first quarter to minus 11% in the second, it still remains high.
  • Though there are signs of a short-run recovery in private consumption demand with the lifting of lockdowns, net incomes and consumer confidence are not at levels that can even restore last year’s levels.
  • 2) As is to be expected, with production restraints relaxed, depleted stocks are being replenished with a fall of 21% in the first quarter turning into an increase in stocking of 6.3% in the second quarter.
  • 3) The decline in fixed capital formation has fallen from a high minus 47% in the first quarter to minus 7% in the second, investment is still falling year-on-year.
  • These are all signs of an economy that is severely demand constrained, requiring a significant step up in government expenditure.

Impact on spending by the Centre and the States

  • Figures from the Office of the Controller General of Accounts for the first seven months of 2020-21 (April to October) indicate that the total expenditure of the central government stood at only 55% of what was provided for in the Budget for 2020-21.
  • In fact, in a non-COVID-19 year, 2019-20, the ratio of actual spending by the central government over April-October relative to that budgeted figure was a higher 59%.
  •  Meanwhile, with Goods and Services Tax (GST) revenues having fallen from their lower-than-expected levels during the COVID-19 months, the States have been cash-strapped.
  • Yet, the government has decided not to compensate them for the shortfall, as promised under the GST regime.
  • States have been left to fend for themselves by going to market and borrowing at high interest rates, which they would find difficult to cover.
  • Needless to say, as a consequence, State spending has also been curtailed.

Why government should avoid fiscal conservatism

  • The loss of jobs and livelihoods that happened during lockdown is sure to affect demand now.
  • This leads to increased indebtedness and the bankruptcies well after restrictions are relaxed.
  • So, the tasks of providing safety nets, reviving employment and spurring demand become crucial.
  • Since the market cannot deliver on those fronts, state action facilitated by substantially enhanced expenditure is crucial.
  • And since government revenues shrink during a recession, that expenditure has to be funded by borrowing.
  • This is no time for fiscal conservatism, as governments across the world have come to accept.
  • Trend suggests that allocations for welfare expenditures — ranging from subsidised food to minimal guaranteed employment — needed to support those whose livelihoods have been devastated by the pandemic, would be reduced over time.
  • As collateral damage, this frugality in a time of crisis is likely to prolong the recession.


The optimism that a V-shaped recovery is imminent, and that optimism, in turn, would justify the view that fiscal conservatism pays. It does not, as time would tell.

Back2Basics: What is V-shaped recovery?

  • A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
  • Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best case scenario given the recession.
  • The recoveries that followed the recessions of 1920-21 and 1953 in the U.S. are examples of V-shaped recoveries.
V-shaped recovery of the U.S. economy

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch