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Economic impact of a third wave, if any, will be very limited: KV Subramanian


Chief Economic Adviser, KV Subramanian, argues why economic fallout of a third wave, if it strikes, will be marginal, also adding that if there had been no second wave, the Q1 growth rate would have been close to 30%. Here are the excerpts of a free-wheeling interview with Shantanu Nandan Sharma:

Q1 GDP number has been good. But is it not because of the low base effect?

First, we have to take into account there was 20.1% GDP growth in a quarter (April-June) that saw an intense second wave of the Covid pandemic. From the health side, the second wave was several times more impactful than the first one. The entire month of May and part of June were under shutdown in most states. Markets and malls in states such as Maharashtra, Gujarat, Tamil Nadu and Karnataka were closed. So one needs to read the numbers in that backdrop.

I mentioned after the Q1 numbers of last fiscal (2020-21) that there would be a “V” shaped recovery. After all, the downslide was the result of lockdowns only. There was no problem with the macro fundamentals of our economy.

How big would have been the Q1 number had there been no substantial second wave?

Had there been no second wave, the Q1 growth rate would have been close to 30%. Construction and manufacturing sectors have done pretty well. Contact-based (e.g. travel and hospitality) services were impacted though. As retail outlets in malls and markets were closed in the months of May and June, the total consumption declined.

The quarterly numbers right from the last year — a sharp decline in Q1 and subsequent increase — were only a reflection of absence or presence of restrictions. So the criticism of consumer demand being not back as yet is not valid. Consumption typically has both demand and supply components to it. If someone wants to buy a shirt but the market is closed, it’s not a demand problem. It’s a supply constraint.

How will the economy be impacted in case there is a third wave?

Considering the pace of vaccination and high seropositivity rate, the impact of a third wave, if any, many’t be high. Also, the (economic) template that was generated during the second wave in terms of restrictions etc. can be implemented once more.

For example, there was no national lockdown during the second wave though there was a clamour for it. So the economic impact of a third wave, if it strikes, will be very limited. It is important to understand that had there been a national level lockdown during the second wave, 20% growth would not have been possible.

Which are the economic indicators that make you optimistic and which are the ones that worry you?
If you compare Q1 export numbers of the current fiscal with that of pre-pandemic 2019-20, there was a growth of about 8%. Also, if you look at the manufacturing and construction sector, the numbers are close to the pre-pandemic level.

It is reflected in the Purchasing Managers’ Index (PMI) (an index of economic trends in manufacturing and service sectors). We can see robust trends in manufacturing sector PMI since September 2020. In fact, the industry as a whole has recovered well. So far as contact-intensive services sectors (where social distancing is imperative) are concerned, the recovery has been slow.

But there are enough reasons to be optimistic. If you compare the macro fundamentals after the global financial crisis (2008) and now, there has been a sea change. Even if there were no supply side restrictions (lockdown etc.) then, the inflation was in double digit. Now, despite so much supply side disruptions, the inflation in the last 16-17 months has been on an average 6%.

Also, the current account deficit during the global financial crisis went up by 6%. Last year, we saw a current account surplus instead. For the ongoing fiscal, there will be a manageable current account deficit. Also, FDI inflow into India after the global financial crisis was about $8 billion, now it is $80 billion (FY 2020-21), 10 times higher.

When do you expect the GDP to hit the pre-pandemic level?

That will depend on the pandemic itself. If some more restrictions are to be imposed, it will impact the contact-intensive sectors. It will also depend on the pace of vaccination. On Tuesday (August 31), for example, we did over 1.2 crore vaccination doses. We can go upto 80-85 crore doses in total by the end of this month.

I expect a double digit growth this fiscal. Considering the high frequency indicators, I anticipate the Q2 numbers will be surprisingly high. And next year, we should have 6.5 to 7%. And then we should be able to accelerate beyond 7% as the reforms that we have undertaken will start power a high growth. There is nothing wrong with the macro fundamentals of our economy. The growth got impacted negatively because of lockdowns and restrictions.

Despite having a robust tax collection, why is the government hesitating to loosen the purse strings? The government’s Q1 spend, for example, is not that encouraging. Right?

If you look at the budgeted CAPEX for the current fiscal it is 35% higher than the last year. In Q1 there were so many restrictions, so the government expenditure came down. Also, the entire government machinery was engaged more in managing the second wave. The focus thus got shifted from the capital expenditure projects. There could be quarter to quarter variations, but I am sure, the overall budgeted spending will happen this fiscal.

Why have big private investments not been grounded as yet?

If you look at the Q4 number of the last fiscal, the gross fixed capital formation to the GDP ratio was six and half years high. Private sector substantially contributed to that. This fiscal too, the private sector CAPEX is expected to be some 1.75 trillion rupees. Many listed companies are making profits and they will likely invest.

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