Q2 GDP: Economy just about grows to pre-COVID size, but some sectors lag badly

Manufacturing and -- to a lesser extent -- construction have grown back to and even beyond pre-COVID levels, albeit marginally.

The bad news comes from the large services sector called “Trade, Hotels, Transport and Communication”. Its size at Rs 5.79 trillion is still 10 percent lower than the Rs 6.38 trillion in Q2 of FY20. From being 1/5th of the economy, this sector has shrunk to 1/6th of the economy. This is worrying because this sector employs a bulk of India's MSMEs and self-employed.

GDP from the expenditure side has shot up largely due to higher capex. Gross fixed capital formation is now 32 percent of GDP, which is excellent. The economy is re-investing one third of what it produces, pointed out Dr Sudipto Mundle, economist and a member of the Fourteenth Finance Commission of India. This may be an engine for future growth. But the laggard is the hitherto powerful engine of India's growth: private final consumption expenditure or PFCE.

The PFCE at Rs 19.7 trillion is 3.5 percent below the pre-COVID level, reflecting lower consumption by those who lost jobs in trade, commerce and transport. Government final consumption has done even worse, falling short by 17 percent versus its pre-COVID comparable quarter.

Valuables, i.e., savings invested in gold, tripled over Pre-COVID levels, probably reflecting a hedge against inflation.

The key takeaway from the Q2 GDP numbers is that we need to restore the informal sector and MSME jobs in the trade, commerce and transportation space. Government spending and consumption too needs to grow. But the economy has shown some innate recovery as evidenced in the 11 percent year-on-year jump in capital formation. This growth can extend further given the low interest rates and the deleveraged balance sheets of companies and cleaned up books of banks. But for capital formation to climb sustainably, private consumption needs to surge.

This requires some of the capital to be invested in construction and services which are more labour intensive. Job growth can spur private consumption which is the second important engine that needs to fire for the economy to grow. It’s possible India makes it to double digit growth in FY22, unless, like CEA Krishnamurthy Subramaniam said, the virus has other plans.

But for sustained 7 percent growth thereafter, we have to persist with job creation and skilling.