India’s true growth trajectory will be revealed next year

Even as these numbers fuel expectations of an economic resurgence, they are also amplified by the low-base effect from their corresponding 2020 periods. Some sectors have been more severely hit than others, and there are divergent patterns in the ensuing recovery as well. If 2020 was the year of collapse and 2021 the year of recovery, 2022 is likely to be the year when the economy reveals its true medium-term growth trajectory. Can it make a leap for good to the 7%-plus band or will it flatter to deceive, as it did in the years prior to the pandemic?

The International Monetary Fund (IMF) and the World Bank have tipped India to make a strong comeback. But there are challenges. Measured in constant prices, GDP for the quarter ended September 2021 is at the same levels as two years ago. In other words, there has been no economic growth in absolute terms.

Different Tracks

The pandemic had a more severe impact on some sectors than others. Sectors such as construction and manufacturing, which are labour-intensive and require the congregation of large groups of people with limited possibility for social distancing, were the worst affected. Further, the pervasive lockdowns and restrictions on movement also severely impacted the trade, travel and tourism sectors.

On the other hand, agricultural activity remained virtually unaffected due to the pandemic, with a bountiful monsoon supporting greater sowing and harvests. In fact, agriculture, along with supply of essential utilities, was the only sector to show a positive growth in gross value added (GVA) for 2020-21. While recovery has been somewhat robust in construction and manufacturing, partly due to the low-base effect, the GVA for transport, tourism and related services remains far below pre-pandemic levels.

States of Stress

The ripple effects of the pandemic have caused massive disruptions to education, livelihoods and income, especially among poorer sections. This will serve as a drag on future economic growth. Most states experienced a contraction in their net state domestic product (NSDP) during 2020-21. Of the 21 states for which 2020-21 data is available, only six have shown a positive change in NSDP. Bihar (2.8% growth), Tamil Nadu (1.6%) and West Bengal (1.3%) were among the larger states in this set.

At the other end, among the larger states, Uttar Pradesh (-6.7%), Punjab (-6.6%) and Rajasthan (-6.6%) saw the biggest contractions.

While data on GSDP is not available for 2021-22, several high-frequency indicators such as mobility levels, electricity use and vehicle registrations suggest a mixed recovery among states (https://www.livemint.com/economy/indias-recovery-engine-emits-mixed-signals-at-states-level-11636355100390.html). Potential future waves of the pandemic could necessitate restrictions on economic activity, and currently loom as a risk factor.

Bright Spots

Despite the uncertainties regarding the future course of the pandemic, the International Monetary Fund (IMF) sees favourable short-term growth prospects for India. In its World Economic Outlook, published in October 2021, the IMF projected that India’s GDP will grow at 9.5% and 8.5% during 2021-22 and 2022-23, respectively. That would place it among the fastest-growing economies in the world. In a similar vein, the World Bank, in its Global Economic Prospects report published in June 2021, projected India’s economy to grow at 8.3% and 7.5% in 2021-22 and 2022-23.

Both the IMF and the World Bank noted India’s increasing vaccination rates, low levels of covid-19 infection and relatively younger population as potential upsides. These projections, however, were made before the discovery of the highly transmissible Omicron variant of covid-19. While it is too early to gauge its potential impact in India, a third wave will definitely jeopardize India’s nascent recovery, and muddy the picture of its true medium-term growth trajectory.

www.howindialives.com is a database and search engine for public data.