A lot has been written about the second-quarter GDP that came in at 8.4 percent year-on-year after a 20.1 percent spurt in the first quarter of FY22.
In Q2FY22, the absolute real GDP of Rs 3,57,300 crore is also larger than the absolute real GDP reported for Q2FY20, at Rs 3,56,100 crore, thus making it appear that the catch-up for the economy to the pre-COVID era is now complete.
This is great news. However, growth does not yet seem to be broad-based and possibly continues to mask the deep pains of certain segments of the population that come under the unorganized sector. Importantly, the crucial understanding that policymakers should now have is the extent of durable damage that has been inflicted by the COVID-19 crisis, and, thus hone up the policy framework in a way to mitigate or at least reduce its impact.
So far as the organized and listed entities are concerned, they are back on their feet and are doing relatively well, and are profitable. Business confidence surveys conducted by the RBI indicate that the mood is relatively buoyant. But these entities are likely to have gained market share vis-à-vis the smaller ones who may have by now gone out of business.
Conditions for a pick-up in private investments are also clearly in place as most companies had chosen to de-leverage during the peak of the pandemic. Negative real interest rates, as well as the government’s Productivity Linked Incentive (PLI) scheme, are the likely enablers. For the private sector, capacity underutilization continues to be large (save a few sectors) and hence they would not immediately push for increasing capacity.
Note that Private Final Consumption Expenditure (PFCE) remains the most crucial contributor to the economy (50 percent plus share in the GDP) and PFCE is yet to regain the pre-COVID phase, even as it shows a 9 percent on-quarter growth in Q2FY22.
Consumer confidence surveys by the RBI indicated a recovery that is still short of levels seen in the pre-COVID period.
The stress in the rural sector is likely large as the demand for jobs under MNREGA has continued to stay higher than jobs generated by the scheme. The government has had to increase the allocation for this program by Rs 25,000 crore for FY22 to enable a larger number of people to be accommodated. Rural wage growth has also been poor, especially for non-agricultural jobs.
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Let’s now focus on another area – generally not an area that economists might have looked at in the GDP. This is the item classified as ‘valuables’ that has jumped by 603 percent on a QoQ basis in Q2FY22 and is also up 183 percent, compared to the same quarter last year. As a proportion of GDP, valuables in Q2FY22 were at 3.3 percent in real terms, up from a meager 0.5 percent in the previous quarter.
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And what exactly are these valuables? These are nothing but expensive durable goods that do not deteriorate over time and are not used in consumption or even production and are acquired primarily as a store of value. Examples of valuables are works of art, precious stones, metals, and so on. This indicates that the excess savings that had probably been piled up by the upper strata of the society during COVID-19 is now being spent for these purposes.
This indicates that growth remains inequitable and needs nurturing before it once again realises its full potential. The reforms measure of the government to kick-start investments will take time to work itself through.
In the meantime, the government needs to ensure that livelihood requirements are taken care of. To this end, the government has again extended its free food programme till March 2022. The RBI is also expected to keep the monetary policy accommodative, yet flexible and attempt at nurturing the nascent recovery while maintaining a hawk eye on the inflation dynamics.