The RBI and Authorities in all probability want to return to the drafting board and re-strategise for elevated commodity costs which could not likely be leading to inflation being transitory as is being presently seen.
(Picture: PTI)

By Jagadish Shettigar, Pooja Misra

With the Indian financial system rising at a document tempo of 20.1{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in Q1 FY22 as towards a contraction of 24.4{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in the identical quarter of FY21, economists and analysts are largely of the view that the low base impact of the earlier yr’s document contraction has contributed to the identical. It is very important observe that whereas GDP numbers seem to look good, it’s no person’s guess that India’s GDP in Q1FY22 of Rs. 32.38 lakh crore is under Q1FY20 degree of Rs. 35.67 lakh crore, ie approx. 9{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} decrease, and can be under Q4FY21 of Rs. 38.96 lakh crore. Nonetheless, maintaining in thoughts that in Q1 FY22, the nation had confronted a humanitarian and financial disaster as a result of second virus wave, macroeconomic indicators are reflective of the truth that because of much less stringent regional and localised lockdowns the financial system comparatively was not that adversely affected ie Q1 FY22 GDP was Rs.32.38 lakh crore as towards Rs.26.95 lakh crore in Q1FY21.

In Q1FY21, whereas agricultural sector has proven a development of 4.52{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}, there was a powerful rebound in manufacturing and building. Manufacturing has expanded by 49.63{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}, whereas building has proven an increase by 68.3{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}. Core sector output grew by 9.4{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} ie coal, pure fuel, refinery merchandise, fertilizers, cement, metal and electrical energy confirmed a constructive development whereas crude oil manufacturing declined by 3.2{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}. With these eight core sectors constituting two fifths of the index of business manufacturing (IIP) and exhibiting an upward tick, IIP numbers for July 2021 are anticipated to develop at 13-15{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811}. The silver lining on the wall has been gross mounted capital formation, ie non-public sector funding which grew at 55.26{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in Q1FY22 and constitutes 31.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of GDP as towards 24.4{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in Q1FY21, nevertheless it’s nonetheless decrease than 34.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of preCovid Q1FY20. India’s Manufacturing Buying Managers Index for July 2021 rose to a 3 month excessive of 55.3, thereby denoting an enlargement in manufacturing actions. 

Excessive frequency indicators for the Indian financial system on a median since June 2021 ie publish the second virus wave peak in April-Might 2021 have been pointing in the direction of an uptick in financial exercise thereby shifting the financial system again on the observe of financial restoration. GST assortment (in August 2021 crossed Rs. 1 lakh crore for the second month in a row), eway payments, mobility ranges, energy demand (18.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} enhance over final yr), auto gross sales and exports have been on an increase. To not miss, work generated beneath the MGNREGA scheme in August 2021 is 58{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} decrease than July 2021 thereby indicating that rural staff are migrating again to city industrial areas for work. 

On the flip aspect, whereas the image on the canvas of financial restoration is interesting, there are specific watch-outs that the Authorities and RBI must look out for and carry on its radar. Of the 4 demand-side development engines ie. non-public ultimate consumption expenditure, authorities ultimate consumption expenditure, gross mounted capital formation and exports, the heavy lifting in Q1FY22 has been performed by exports, on the again of the V formed restoration being witnessed at a world degree. With the second virus wave leaving its mark on almost all households, q-o-q numbers for consumption present that non-public consumption has contracted 8.9{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} in Q1FY22 as towards the earlier quarter, whereas exports not solely grew 7.2{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} q-o-y but in addition crossed pre Covid ranges. As per the OBICUS survey for Q42021, capability utilisation (CU) numbers confirmed that whereas (CU) had elevated to 69.4{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} as towards 66.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} within the earlier quarter, it was nonetheless not wherever close to 73.6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} of Q2, 2019-20. Additionally, companies sector, particularly contact intensive and employment producing sectors, tourism and hospitality and so forth. are persevering with to lag. With the tempo of vaccinations growing (as of Sept 1, 2021, 66.35 crore complete doses administered, of which 51.10 crore first dose and 15.25 core second dose) and pageant season setting in, the anticipation is that there can be a requirement revival however not at a fast tempo offered the anticipated third wave comes beneath management with passable progress in vaccination drive. Bettering shopper sentiments particularly publish the onslaught of the second virus wave will likely be key to demand restoration and enhance discretionary spending. 

Agreeably, some extra key measures undertaken by the Authorities within the latest path resembling detailing of the Asset Monetisation scheme and modification to the Retrospective Tax has boosted investor sentiments and can assist additional drive development. The roadmap laid out by the Authorities just lately for the asset monetisation pipeline is a welcome step and by unlocking worth of unutilized or underutilized public property and creating of latest income sources solely search to drive employment alternatives together with balanced regional growth. Elevated employment will result in elevated earnings and better demand. Nonetheless, profitable implementation and environment friendly execution on the floor degree is vital and private and non-private sector should now collaborate successfully to allow creation of infrastructure by way of monetisation. Additionally, with the Authorities getting rid of the retrospective tax, it has perked up the curiosity and a focus of overseas and home buyers. An unambiguous tax regime with transparency being a key part of its primary framework will assist entice overseas direct investments into the nation and provides the requisite push to constructing of an Atmanirbhar Bharat. 

It might solely be honest to state that in these attempting instances of Covid, the Reserve Financial institution of India (RBI) has undertaken standard and unconventional stimulus measures and stepped as much as its function of being the financial coverage administrator. Although inflation ranges are on the rise, RBI in its financial coverage assembly in August 2021, selected to deal with financial development over inflation. In its Monetary Stability Report, July 2021 the financial authority had said that the growing inflation is transitory in nature and with worldwide commodity costs dealing with a broad based mostly upswing and international and home provide chain dealing with disruptions the state of affairs would solely enhance with Covid restrictions being eliminated and financial exercise reviving. Nonetheless, with inflation being across the higher tolerance degree of 6{c34e2c9cd63a11c97fab811dbaaefe0cfbb1edd2527888e1a44d36f3491ee811} for someday now and gross margins of Corporates witnessing a squeeze, it won’t be applicable to contemplate inflation to be transitory in nature. 

With commodity costs being at multi-year all time excessive ranges in FY 21, it has led to elevated uncooked materials and enter prices for shopper sturdy, chemical and capital items sector. An attrition led provide strain on availability of labour for the know-how sector. Elevated enter prices of uncooked supplies and labour are solely adversely impacting gross revenue margins of Corporates regardless of gross sales ranges returning to normalcy. Whereas with present demand constraints, Firms are being compelled to soak up elevated manufacturing prices as of now, and it might solely be a matter of time earlier than Corporates cross on the elevated prices to shoppers, particularly, with demand revival happening as a result of festive season. Thus, the RBI and Authorities in all probability want to return to the drafting board and re-strategise for elevated commodity costs which could not likely be leading to inflation being transitory as is being presently seen. 

(Dr. Jagadish Shettigar, Professor, Economics, Birla Institute of Administration Know-how, Higher Noida and former Member of the Prime Minister’s Financial Advisory Council. Dr. Pooja Misra, Affiliate Professor, Economics, Birla Institute of Administration Know-how, Higher Noida. Views expressed by the authors are their very own.) system/indias-economic-growth-story-revives-but-what-picture-are-q1-gdp-numbers-painting/2324147/

India’s financial development story revives, however what image are Q1 GDP numbers portray?