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Arthvyavastha Ki Baat

 Economic

Factors Defining Rest of Year' Course of Indian Economy

The first-quarter GDP growth number — a contraction by 24% — was on expected lines and shows that the Indian economy has slumped sharply due to the lockdown.

“Growth for the full year is likely to be in the region of (—) 6.4 per cent, which is premised on a low negative growth number for the first two quarters for certain, possibly a close to positive number in the third quarter, and positive growth in the last quarter,” writes Madan Sabnavis, chief economist of CARE Ratings.

But two basic factors would influence the assumptions being made on the growth prospects for the coming quarters.The first is the process of “Unlocking”. It has been observed that with the economy moving from the stage of a total lockdown in April to a gradual opening up of the windows in May and June, and then the door opening up a little more significantly in July and August, the movement from one stage to another did reflect in the macro-economic numbers such as the Index of Industrial Production (IIP).

Sabnavis cautions that while it is reasonable to assume that the “Unlock” process will be positive for the economic sectors, there is no assurance that there will not be localised lockdowns.

“The Centre has made strong statements on this issue, but the states could end up taking specific decisions. This affects economic activity as supply chains, which span the entire country, get impacted sharply. Also, business units are not confident about starting or expanding their business,” he writes.

The second factor which will play a role in the economy’s growth prospects in the coming months is the possibility of a revival package from the government.

“This can be a course changer for the growth trajectory,” says Sabnavis.

So far, support from the government has been more through the indirect route, where food relief for the poor has been combined with more aggressive lending by the financial system with guarantees in different forms.To boost growth presently, there should ideally be some additional capital expenditure by the government which goes beyond what has been provided in the budget.“This seems to be the logical solution as the first quarter GDP numbers show a decline in both consumption and investment. By increasing capital expenditure, the government can begin a virtuous cycle of creating assets as well as providing employment,” he concludes.

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