The economy may now be poised to return to normal growth trajectory, with the latest figures for the quarter arriving just as the nationwide vaccination campaign to immunize the population against the Covid-19 virus has begun. Much also depends on the success of the vaccination campaign for the economy to build on the 0.4% growth recorded in the third quarter of the current fiscal year, after two quarters of sharp contraction. Gross value added (GVA) increased by 1% in the last quarter.
Simply put, all things considered, the worst seems to be behind us. After a 15.9% contraction in the first half of 2020-2021, growth should stabilize in the second half, according to the estimates put forward. Undoubtedly, the main driver is the increase in public spending, not only for activities related to the pandemic, but also to stimulate demand and employment in key sectors such as construction, roads, highways, etc.
Even the private real estate sector is returning to the growth path, thanks to favorable interest rates, incentives offered by developers to offload pending inventory, and Sops by banks to boost credit in markets. relatively secure middle and upper income segments. A number of state governments have helped by lowering circle rates for land, as well as the stamp duty on property registration.
The agricultural sector is another beacon of hope, with growth of around 4% in the last quarter and a record growth of 3% year-round. A good monsoon, high agricultural yields and food inflation boosted rural incomes. Perhaps one of the reasons for the slow response elsewhere in the country to the protests of Punjabi farmers against agricultural laws has been this year’s good harvest. Nonetheless, it will help if the government on its own has made the move, suspending the implementation of reforms until the Supreme Court-appointed panel of experts has submitted its report. Sullen and angry farmers in a key state are not helping anyone.
Back to the growth figures. Manufacturing was also back on track, recording 1.6 percent in the third quarter, suppressing demand amid extended lockdowns that found release after the gradual opening. The sector is expected to return to normalcy, although new pressure points in creeping protectionism and high fuel prices could prove to be a drag. The case for reducing fuel taxes by both the Center and the states remains strong, especially when relatively moderate energy prices can stimulate growth and stop inflationary pressures in the economy.
As it stands, inflation fears are starting to scare the stock markets. The rise in bond yields is also a negative indicator. High energy and food prices would inevitably prompt the central bank to step in to honor its commitment to keep consumer inflation in the 4-6% range. In turn, a higher discount rate would have a negative impact on growth. As the informal sector was still reeling from the devastating effects of the pandemic, small businesses, which employ disproportionately large numbers of people, will suffer more if steps are not taken to revive them. Of course, a lot depends on the success of the vaccination program that began on March 1.
Despite several reported issues in how the online check-in works to take the beating, it is hoped that the nationwide operation will succeed in eliminating fear of the virus. At a minimum, one third of the population must be vaccinated before herd immunity can be achieved. States like Kerala and Maharashtra, which are in the throes of a resurgence, can only avoid lockdowns if the vaccination program is implemented smoothly.
Fortunately, the price of the vaccine is unlikely to prove to be a drag, although state governments should give it completely free to poorer sections, on a priority basis. Poor people around the world have suffered the most from the pandemic, having lost their livelihoods and accounting for a high percentage of Covid-19 infections. It is important that growth regains momentum as soon as possible. Public spending will need to stimulate growth not only in the current fiscal year, but also in the next. Fortunately, the government’s tap remains wide open, ready to release Rs 6 lakh crore in grants only during the current fiscal year. Under these circumstances, reluctance to reduce fuel taxes might be better appreciated.