Sushma Ramachandran

The Indian economy is finally out of the trough. After two-quarters of complete collapse and a technical recession, the third quarter (October to December ) of 2020-21 has shown a marginal growth of 0.4 per cent. This shows that the green shoots recorded in terms of higher GST collections, enhanced power and oil consumption and improved rail traffic over that period, have ultimately translated into a firm impetus to gross domestic output (GDP) growth.

A look at the detailed data is more revealing.  On the positive side, the construction sector grew by 6.2 per cent, electricity rose by 7.3 per cent and the financial services sector showed a spurt of 6.6 per cent. Agriculture too continued to be a bright spot with a rise of 3.9 per cent, even better than the 3 per cent recorded in the second quarter. The critical area of manufacturing did show a marginal rise of 1.6 per cent but the employment-intensive trade, hotels and transport segment continued to contract by 7.7 per cent.

One of the problems, however, in such data is the inability to capture developments in the very large informal segment of the economy. The pain in this sector is brought about more clearly by the unemployment studies of the Centre for Monitoring Indian Economy (CMIE). These find an unemployment rate of 6.9 per cent for February, rising from 6.53 per cent in the previous month. This is lower than the 7.6 per cent recorded for December 2020 but is still inordinately high, indicating that job losses continue to plague both the rural and urban economy.

Dismal scene

Such job losses are bound to be substantial in the trade, hotels and transport sector which continues to face a crisis as hesitancy to travel or use public dining continues leading to capacities remaining underutilized. Airlines are also facing the brunt of reduced travel along with higher fuel costs that are eroding any profitability that might have accrued due to the gradual opening of domestic routes.

Restaurants appear to be coming back to some semblance of normalcy since December in the major metros but this could be derailed by the surge in cases in some states. Hotels continue to face a crisis especially those dependent on foreign business and leisure tourists. Business travellers are increasingly working from home and using technology for international meetings while global tourism remains in a complete slump.

It is in this context that one cannot over-emphasise the impact that the current vaccination drive will have on economic recovery. The marginal rise in growth during the third quarter is undoubtedly a hugely positive development but the sustainability of this process will hinge on normalcy returning to daily life. The surge in Covid cases in a major industrial state like Maharashtra is an issue of great concern. This state along with Gujarat is a dense hub of manufacturing units and an upsurge of the virus leading to multiple containment zones can slow down economic revival. The vaccination drive, therefore, becomes increasingly significant as a way to bring confidence and demand back to the economy. 

Fortunately, the third phase of the programme seems to have elicited a more enthusiastic response than the earlier ones, though initial glitches regarding the app must be overcome in the coming days.

Fuel is a spoiler

Apart from the Covid issue, another factor that could affect the process of economic revival is the rise in fuel prices. There has been a sharp increase in excise duties on oil products over the past year after the crash in world crude prices in April and May. Even during the rest of the year, average prices hovered around 40 dollars per barrel for the benchmark Brent crude, as against over 60 dollars per barrel in 2019. The revenue from these higher excise duties was a bonanza at a time when other revenue sources had dried up owing to the complete closure of all industrial operations.

It also did not have any impact on consumers at the time as the global rates were extremely low. The situation has now altered dramatically with world oil markets showing a firmer trend in prices. Demand has risen and global inventories have been drawn down. The oil-exporting cartel, the Organization of Petroleum Exporting Countries (OPEC) is ensuring that production quotas continue so that surplus availability does not bring about a fall in prices. OPEC is now collaborating with Russia and other major oil producers which makes the current strategy more effective than ever before.

The net result is that India has to worry about a mounting oil import bill in 2021-22 as over 80 per cent of oil consumption is sourced from abroad. In addition, there are inflationary pressures owing to high oil product prices. Consumers are also hard hit with retail prices of petrol reaching a record level of  Rs. 100 per litre. 

Clearly, this is the time for the government to consider the long term impact of high prices on the economy, as well as the burden being placed on the common man. The government must cut excise duties on oil products in order to minimize the cascading effect on the economy. A decision on this issue becomes all the more urgent as manufacturers have already begun announcing plans for raising prices of a wide range of products in response to the soaring fuel rates.  

Reality sector back on Track

On the plus side, however, the third quarter data has revealed that growth has returned to the construction and real estate sectors. This indicates that going forward employment generation may pick up as these are also labour-intensive sectors. Besides, the push to infrastructure growth is badly needed as this is a sector that is still lagging as a result of the pandemic. The latest output data for the eight-core sectors including coal, crude oil and electricity showed an 8.8 per cent decline during the period from April to January 2020-21 as against 0.8 per cent in the same period of the previous year.

The other shining spot in the economy remains agriculture which has been showing a rising graph even during the two months of the lockdown in March and April last year. Even during the current year, the prospects are bright for farm output though there continues to be a great need for diversification of crops and promotion of food processing industries to raise incomes.

The third-quarter data has thus raised hopes that economic growth will continue to be a rising path for the rest of the year. Most early indicators are that the trends of higher manufacturing and agricultural output will continue especially based on the latest GST collections which are buoyant. At the same time, much will depend on decisions taken on taxation related to petroleum products as well as the progress of the vaccination drive. In case, these are in the right direction, the country can look forward to a V-shaped recovery in the coming months.