What lies beyond India's 8.4% GDP growth

Photo: Bloomberg
Photo: Bloomberg

Summary

The Indian economy achieved a real GDP growth rate of 8.4% in the September quarter. However, the emergence of the Omicron variant of SARS CoV-2 could scuttle global demand and worsen supply chain pressures. Mint explores what’s in store for the economy.

The Indian economy achieved a real GDP growth rate of 8.4% in the September quarter. However, the emergence of the Omicron variant of SARS CoV-2 could scuttle global demand and worsen supply chain pressures. Mint explores what’s in store for the economy.

What do the Q2 GDP numbers show?

During the second quarter, India’s GDP grew at 8.4% as against a contraction of 7.4% in the year-ago period. Private final consumption expenditure, which constitutes 54.5% of the total GDP, increased by 8.6%. Gross fixed capital formation and government expenditure rose by 11% and 8.7%, respectively. Agriculture, manufacturing and mining saw steady growth. So did contact-intensive sectors such as hotels, trade, and transport. Construction activity, a key indicator of bottom-of-the pyramid jobs generation, surged at 7.5%. In absolute terms, Q2FY22 GDP, at 35.73 trillion, was a bit ahead of the GDP in Q2FY20.

What contributed to the growth?

Mobility increased during the second quarter, thanks to the easing of regional curbs imposed to check covid-19, supported by a robust pace of vaccination. Manufacturers prepared for the festival season. Output, new orders and exports returned to expansion territory, leading to India’s Purchasing Managers’ Index (PMI) rising to 53.7 in September from 52.3 in August (a reading above 50 indicates expansion). Increased investment levels, constituting 32% of total GDP, were reflective of improved business confidence. Rural demand backed by a fairly strong Kharif output was resilient, outpacing demand from cities.

Better position
View Full Image
Better position

What can be done to sustain this growth?

The focus must be on strengthening consumption demand. At present, non-economic factors such as the fear of contracting the virus are limiting demand; people are confining themselves to their homes and avoiding shopping at brick-and-mortar stores. Higher vaccination coverage and appropriate fiscal measures may help drive and sustain growth.

What policies are showing an impact?

The government is focusing on building an ‘Atmanirbhar Bharat’, implementing production-linked incentive schemes to boost domestic manufacturing. Besides, the asset monetization scheme, setting up of a bad bank, and keeping policy rates low underline that policymakers are keen on attracting domestic and foreign investors and reviving and reaping the multiplier benefits of increased capex. On the flip side, one needs to watch out for the ripple effects of the three farm laws being repealed.

What are the risk factors involved?

The Omicron variant poses a renewed risk to global growth. Countries are renewing curbs and restricting travel. An outbreak can impact India’s exports and worsen the supply chain nightmares that have sustained for much of 2021. Other threats include high crude oil prices and the pressure on the US Federal Reserve to raise interest rates sooner than planned. Businesses, investors and policymakers must watch out for all these developments.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App