Context- The Q-2 sharp recovery is very tactical because of pent-up demand, because of lockdown and the Data used for quarterly growth rates are weak and questionable.
What in the news-
The second quarter GDP contracted at a slower pace of 7.5 percent compared to a massive 23.9 percent in the first quarter of the current fiscal.
- The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.
Critic’s view– India had introduced one of the strictest lockdowns in the world which has resulted in the sharpest output contractions and massive losses in terms of jobs and livelihoods.
Why GDP data should not be taken as sustainable recovery?
- The source of information is not reliable– Very little up-to-date primary information from farms, factories and offices is available for the estimation.
- Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.
However, the quarterly figures do indicate the broad direction of change.
- GDP in the manufacturing sector– It rose 0.6 percent in the September quarter, in a big sign of recovery compared with a crash of 39.3 percent in the April-June period.
What are the challenges for sustainable recovery?
- Weak aggregate demand-
- Revenue shortfalls- The government’s debt-GDP ratio has gone up though.
- Bank credit growth in the economy continues to decelerate.
- The cumulative growth of the index from April to October this year stood at negative 13% when compared to the same period last year.
- Balance of payment surplus– the shortfall is on account of a sharp decline in investment demand, denting potential output.
- Both exports and imports have shrunk but imports have shrunk relatively more than exports, such a sharp fall in import demand does not augur well for a growing economy such as India.
- Rising foreign exchange reserves- India’s flourishing foreign exchange reserves are made up of short-term debt flows; they are not our net export earnings.
- Sudden booming stock market– This entirely driven by short-term foreign capital inflows.
- Such inflows are highly fickle, representing hot money, which can quit the financial markets in a jiffy if perceptions change for any exogenous reason.
- As an additional expenditure on government consumption or investment or credit growth remain muted, recovery is likely to remain modest.
- Economic recovery could still prove to be premature and illusory – Economists have reservations about reading too much into the September-October data as a sustainable trend.