A hypothetical proposition

THE THIRD QUARTER ECONOMIC RECOVERY

Udayan Hazarika

(The writer can be reached at udayanhazarika@hotmail.com)

Ministry of Statics and Programme Implementation (MOSPI) has recently ( February 26) come up with the provisional data on quarterly estimates of GDP for Q3 of 2020-21 ( FY-21) showing that the economy is out of recession as of now as it registered a GDP growth of 0.4 per cent in the Q3 of FY21. Taking this into account, the Government in the Ministry of Finance appears to be upbeat assuming it to be the quick economic recovery. But if the data which are provisional in nature, gives the same trend when the actual data arrives, than it would be miraculous indeed in the face of our first quarter performance of 24.4 per cent contraction compared to the same period last year and the second quarter performance of 7.7 per cent contraction against the same period of last year. The present data indicates that we are going to achieve a 0.4 per cent growth over the same period last year. Arithmetically, with the available provisional data, it is possible to arrive at this figure. But if we examine the third quarter performance of last year, it would be visible that there was in fact a fall in the third quarter growth in last year as against the second quarter. In last year 2019-20, as against the second quarter growth of 4.6 per cent, third quarter growth was only 3.3 per cent. And it is under this reference that current year's third quarter growth is calculated which is giving us a figure of 0.4 per cent growth. If we separate the macro variables, it will be observed that except for Gross Fixed Capital Formation (GFCF), all other variables have registered negative growth over the third quarter last year. As against the last year's third quarter, GFCF of Rs 11.64 lakh crore current year's Q3 GFCF was Rs11.94 lakh crore which gives an increment of about 2.5 per cent. This indeed is a significant rise and a good sign for the economy as in one way, it means increase in production due to increase in investment on fixed assets such as machinery and equipment which are used in the production process. Apart from this, we have a fall in the private final consumption expenditure from Rs 21.72 lakh crore in the Q3 of last year to Rs 21.21 lakh crore in the current year – i.e. a fall of about 2.35 per cent. In order to keep the growth path of the economy intact, it is essential that expenditure on private final consumption must consistently rise. This is the highest contributory factor to the gross domestic product comprising about 55 to 60 per cent of the GDP. Thus, higher we achieve expenditure on private final consumption higher will be the GDP. Unfortunately, there was a significant fall in this variable in the third quarter of 2021 compared to the same period of last year. In case of Government final consumption expenditure, it was a pathetic scenario because despite heavy doses of pumping of funds in the sector in the name of compensating the loss suffered due to Covid-19, nothing seems to be working as the figure shows a fall from Rs 3.59 lakh crore in the 3rd quarter of last year to Rs 3.55 lakh crore in the third quarter of current year. There was also a fall in the exports from Rs 7.08 lakh crore to Rs 6.75 lakh crore – a fall of about 4.7 per cent. Because of this fall in export, despite significant fall in imports, the economy failed to reap the benefits in balance of trade in the external sector. There was a fall in the percentage participation of export in the GDP from 19.6 per cent in the Q3 of last year to 18.6 per cent in the Q3 of current year.

Let us now have a look at the demand side performance of the sectors in terms of Gross Value Additions (GVA). As usual agriculture has shown a 3.9 per cent rise compared to 3.3 per cent of last year. Mining and quarrying still lag far behind with contraction of about 5.9 per cent. The good news is that manufacturing sector has showed a recovering trend with growth of about 1.6 per cent but this again is due to the fall in Q3 value of last year compared to Q2 of the same year. The current year's Q3 value of Rs 5.56 lakh crore is although higher than Rs 5.46 lakhs crore of Q3 of FY-20 yet less than Rs 5.65 lakh crore of Q2 of last year. The service sector has shown a tendency to recover. The construction sector has shown a pick-up value of Rs 2.57 lakh crore of the last year to Rs 5.73 lakh crore in Q3 of current year showing a growth of about 6.7 per cent. However, trade, hotels , transport and communication is still lagging far behind as there was a fall in the value from Rs 6.64 lakh crore in the Q3 of last year to Rs 6.12 lakh crore in the current year. This gives the Gross Value Addition (GVA) to the tune of Rs 33.38 lakh crore in the Q3 of FY21 as against Rs 33.05 lakh crore of the same period last year, leading a meagre 1.0 per cent growth in the quarter.

The index of industrial production for the Q3 shows a recovery in respect of manufacturing (1.2 per cent) and electricity sector (6.7 per cent). Manufacturing output contracted by 1.7 per cent in November compared to an expansion of 4.1 per cent in October and 1.6 per cent expansion in December. Similarly, for electricity consumption, there was an expansion of 11.2 per cent in October, 3.5 per cent in November and 5.1 per cent in December giving an overall average expansion of 6.7 per cent during the quarter. However, the remaining two sectors namely mining and metallic minerals are still under contraction.

As per the available data (Controller General of Accounts) the Government of India's fiscal deficit is going to be Rs 12.34 lakh crore as in January which is about 67 per cent of the revised budget estimates of FY 21. The fiscal deficit is estimated at Rs 18.48 lakh crore which will create a fiscal deficit of about 9.5 per cent of GDP for the current year. With this huge fiscal deficit coupled with the next year's borrowing programme the economy will be stressed with huge inflationary pressure as major part of the borrowed a mount is programmed to spend in revenue account of which interest payment is the highest.