Q4 FY21 performance rebounding: A distance dream

THE INDIAN ECONOMY

Udayan Hazarika

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

The fourth-quarter performance of the economic variables for the year 2020-21 (FY-21) has recently been released (31-05-21) by the National Statistical Office (NSO) showing the trends as expected earlier. The contraction of the economy for the year 2020-21 has been estimated at 7.5 per cent which indeed is a tremendous decline - beating all previous declines for the last 40 years. The last recorded heavy fall was in 1979 when the GDP growth decelerated to the level of -5.2 per cent and there was a contraction of the economy to the tune of 10.95 per cent compared to the previous year (1978). The present estimate is slightly better than the one estimated on February, 21 which assessed contraction of the GDP around 8.0 per cent. The fall indeed was sharp and the credit goes to the NITI Aayog and those sitting at the helm of affairs - daydreaming about the rebound of the economy by the second quarter of 2021. As per the present estimate, the GDP at constant prices (2011-12) is estimated at Rs 135.13 lakh crore as against the first revised estimate of GDP for the year 2019-20 of 145.69 lakh crore. The year 2019-20 itself was a sluggish year even though more than three-quarters of it was eventless where there was no pandemic which came only in the latter part of March. That year saw a mere 4.0 per cent growth as against the previous year of 2018-19. The sustainability of the economy is declining as vulnerability is increasing. Rebound on the demand side, there has been more than a 6 per cent fall in private final consumption expenditure (PFCE) compared to the previous year. Private final consumption is the foremost important item that comprises more than 50 per cent of the GDP. In FY 21, there has been a fall in its contribution to GDP from 57.1 per cent of the previous year to 56 per cent. In absolute terms, it has fallen from Rs 123.09 lakh crore to Rs 115.68 lakh crore. This is quite a significant fall indeed. The fall occurred mainly during the 2nd quarter of the year evidently due to the impact of lockdown and then it picked up in the third quarter but interestingly there was fall again in the fourth quarter when it was supposed to pick up. Government intervention to boost the consumption came late and it also did not receive an adequate response. Fund distributed was inadequate and among those who received many did not spend.

Gross fixed capital formation is another variable that constitutes around 25 to 30 per cent of the GDP. In absolute terms, the GFCF has fallen from Rs 58.51 lakh crore in 2019-20 to Rs 53.50 lakh crore in FY 21, leaving a gap of about Rs 5 lakh crore. This resulted in a fall in its contribution to GDP from 28.8 per cent to 27.1 per cent. The decline is mainly induced by the private sector. Private investment has not been on good terms with the economic growth of the country especially since 2016. It has been falling since it peaked at almost 42 per cent of GFCF in 2016 and started falling since then till it reached about 35.5 per cent in 2019. Fortunately, thereafter it showed a good start in the year 2019 (36.7%). There has not been any significant growth in private investment which confined mainly around 11 per cent. Ever since the first lockdown, in the 1st year of the pandemic, the investment atmosphere has never been congenial for the private investors. Government intervention in the form of easy loans did not work much due to prevailing uncertainties. It is time for the Government to intervene in this area. Government spending has always remained more or less fixed and therefore the contribution of the Government's final consumption to GDP is confined to 12 or 13 per cent. FY 21 has a silver lining in this area. As against the previous year's contribution of 11.2 per cent to the GDP FY22's contribution has improved significantly to 12.5 per cent.

The supply-side performance, as usual, is pathetic excepting the performance of the agricultural sector. Although lower than the growth of the previous year (4.3%), the agricultural sector has grown by 3.6 per cent in terms of its values. There has been unsteady growth across the quarters with the highest being 4.5 per cent in Q3 and the lowest being 3.0 per cent in Q2 evidently under the impact of lockdown. As per recent data, rabi crop harvesting has been done and this is reflected in the Q4 performance. Data shows that Kharif plantation till March (sowing season) had crossed the target. In the case of rice 17.85 per cent more area coverage has been achieved while in the case of pulses 37 per cent and overall 15.42 per cent has been achieved i.e. as against 4.4 million hectares, planning has been done in 5.09 million hectares.

The manufacturing sector made good progress during Q3 and Q4 but the overall performance remained negative – a contraction of about 7.2 per cent. The situation till mid-February was encouraging which is reflected in March figures showing a growth of 6.9 per cent. Rebounding was almost certain as people thought during March. The HIS Markit India Manufacturing Purchasing Managers Index (PMI) remained strong with 57.7 in January 2021 from 56.4 in December 2020. The trend was looking good and IIP general index was also picking up 22.4 per cent on March 21 from a negative 3.4 per cent in February. But the second wave of the pandemic has disrupted all the expectations. Another fall is imminent across Q1 and Q2 of FY-22. The sector needs further protection especially States need to nourish their MSMEs if necessary pushing further long-term funds to tide over recent pressure on them.

The most unfortunate sector is the service sector which has collapsed during the lockdown 2020 remained at a critical stage.

During Q1, the construction sector contracted by almost 49.5 per cent which was unprecedented but somehow repaired with government intervention and brings it up to the level of 7.2 per cent in Q2. The growth rate picked up during Q3 (6.5%) and Q4 (14.5%). But due to the initial setback overall performance remained negative at 8.6 per cent contraction. Trade, tourism and Hotel sector could recover – not even for a single quarter. The real estate sector came up positive in Q3 and Q4 but will fall again for the second wave. The overall fall is assessed at 1.5 per cent.

The GVA at constant prices has been estimated to contract by 6.2 per cent while GDP is at 7.3 per cent. The large-scale subsidies and tax differentials are responsible for this wide gap between the two. This is a wake-up call for the government. Before making any plan to boost the economy, the Government must first workout plans for the complete vaccination of the nation. Only that will save the country.