Why it’s safe to say India’s economic recovery is real and might accelerate

The Indian government’s economic template to deal with a Covid-19 wave has now been tested. GoI refused to enforce a national lockdown during the devastating second wave in April and May 2021. If and when a third wave whacks the nation, the template is likely to remain the same.

This would ensure that there are no large-scale disruptions to businesses. This will also rule out any more dramatic drop in India’s economic graph.

Instead, the chart is likely to climb up. The only question is: how fast will the economy heal?

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“I expect a double-digit growth this fiscal.

And considering the available indicators, I anticipate Q2 numbers to be surprisingly high,” India’s Chief Economic Adviser KV Subramanian tells ET. “Next year we should have 6.5- 7% growth. And then we should be able to accelerate beyond 7% as reforms that we have undertaken will start powering a high growth.”

Subramanian’s optimism does not seem to be based on the 20.1% gross domestic product (GDP) growth of April-June quarter, an unusually high number on the back of a low base, as the Indian economy had contracted by an unprecedented 24. 4% a year ago.

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Policymakers and economists are now clinging to several other indicators — from export to manufacturing to FDIs — that suggest the recovery is real and it could accelerate.

India’s total export during the first three months of the current fiscal, for example, is spectacularly high. It is 22% higher than the corresponding period of FY2020 ($131 bn as against $107 bn), if we ignore the Covid-hit FY2021 from the comparison.

Manufacturing and construction sectors — also the country’s major employers — have not touched pre-Covid levels, but their growth as documented in Q1 data has been robust enough to instil confidence that India may soon have a faster recovery. Also, 4.5% growth in agriculture in Q1 over last year’s positive growth has brought in hopes that the rural economy will get an early momentum. As far as the collection of goods and services tax (GST) is concerned, August saw a 30% increase year-on-year. More significantly, barring the month of June, the GST collection — often considered a barometer for consumption across sectors — has been above the Rs 1 lakh crore-mark during the past 12 months.

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GST COLLECTION IN AUGUST Rs 1.12 lakh cr, 30% more year-on-year *Barring June, GST collection has been above Rs 1 lakh crore in the last 12 months

There has also been an uptick in foreign direct investment (FDI) inflows into India during the pandemic period. A sneak preview by ET of some of the nearly finalised FDI proposals, including 36 projects from US companies totalling an investment of $14 bn, indicates how India is turning into a hot destination for global companies looking to expand their footprint.

According to data compiled by Invest India, an investment facilitation agency under the ministry of commerce and industry, as many as 77 deals in electronics, with an investment proposal of $11.5 billion, as well as 27 deals in renewable energy sector ($4.7 billion) are at the final stage. The agency is also hopeful of clinching another eight deals (totalling $53 billion) in the petroleum and natural gas segment.

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“India has been benefiting because global supply chains are coming closer to the marketplace.”

— Deepak Bagla, MD & CEO, Invest India

Invest India CEO Deepak Bagla explains the rationale behind such a rush of proposals. He adds that in FY21, a Covid year, India received FDIs worth $81.5 billion, the highest ever, even as global FDIs shrank by 35% during the period.

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There is no consensus as yet on when India will bounce back to pre-Covid GDP level. As the contact-intensive services sectors, including travel and hospitality, require the most stringent social distancing norms, these will recover only at a slower pace and the country will have to find some early moving sectors to leapfrog.

“It appears exports will play a relatively more significant role in the GDP uptrend this year and going forward,” says Aashish Chandorkar, counsellor-designate to the Permanent Mission of India at the World Trade Organisation, adding that India has set a target of $400 billion for exports of goods this year. “Including services, we may top $625 billion, which will be the highest ever annual exports figure.”

Beyond these optimistic notes, there are reasons for anxieties as well. India Inc, for example, has been cautiously optimistic, not loosening the purse strings as yet, even though many big companies turned highly profitable since the outbreak of the pandemic, mainly on account of lower corporate taxes and better handling of expenditure. Gross fixed capital formation in Q1 is still way below the pre-Covid level.

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The chairman of the economic advisory council to the prime minister, Bibek Debroy, argues that there are sectors where investments are already taking place. “Many reforms introduced by the government make factor markets efficient. These work with a time lag, extended by the epidemic. Stated simply, across the board, private investments should recover towards the second half of 2022-23,” he says.

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Fear in the corporate sector is understandable. After all, the pandemic still persists.

But why is the GoI treading so cautiously, pausing at every step before spending its own earnings? Pronab Sen, former chief statistician of India, says that it is nothing but hype that the government is spending a lot during this pandemic. “If you compare Q1 data of the current fiscal with the corresponding period of FY20, a normal year, the government consumption plus investments have gone up merely by half a lakh crore rupees while taxes have increased by two lakh crore rupees,” he says, adding that the government must spend more — either by increasing direct cash transfers or budgeting more capital expenditure.

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CEA Subramanian counters this argument: “If you look at the budgeted capex for the current fiscal, it’s 35% higher than last year. Yes, there could be quarter to quarter variations, but I am sure, the overall budgeted spending will happen this fiscal.”

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