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The Momentum Of Economic Recovery Has Been Moderated By The Ravaging Second Wave Of COVID-19: DEA
(10:27, 10 Jun 2021)

Provisional GDP estimates available for January-March quarter (Q4) of FY 2020-21 confirm a V-shaped recovery in India's economic prospects in the second half of the year after an unprecedented COVID-19 induced contraction, the Department of Economic Affairs said in its monthly report. India's real GDP is estimated to grow at 0.5 per cent in Q3 and 1.6 per cent in Q4 of FY 2020-21 leading to an upward revision in annual real GDP growth from (-)8.0 per cent (2nd Advance Estimates) to (-)7.3 per cent in FY 2020-21.

As economic activity resumed following gradual unlocking and policy support, private consumption grew at 2.7 per cent after falling for three consecutive quarters, the report stated. Moreover, contact-intensive hotels, trade and transport sectors contracted by only 2.3 per cent in Q4 after large declines in previous quarters. Construction rebounded to grow at 14.5 per cent in Q4.

The report cites the momentum of economic recovery to be moderated by the ravaging second wave of COVID-19. Unlike the first wave, the effect of the second wave has been asynchronous in its onset across states and wider in its spread as the second wave also entered the rural hinterland. Simultaneously, the world's largest vaccination drive is underway in India with 23.9 crore doses administered as on date.

After declining during the second wave, high frequency indicators such as power consumption, E-way bills and foreign portfolio investment (FPI) flows witnessed uptick in the second half of May 2021. Agriculture sector continues to offer comfortable prospects amidst a normal monsoon forecast, smooth food procurement and distribution, and MGNREGA employment. However, sequential slackening was observed in eight core industrial output, PMI manufacturing, steel consumption, auto sales, tractor sales, petroleum products consumption, rail freight, port and air traffic, PMI services, highway toll collections, GST collections and UPI transactions.

CPI inflation eased to 4.3 per cent in April 2021 (as against 7.2 per cent in April 2020) from 5.5 per cent in March 2021 driven by decline in food inflation and a favorable base effect. Going forward, the trajectory for CPI inflation may derive comfort from the forecast of a normal south-west monsoon but remains vulnerable to pressures arising from high international commodity prices and logistics costs across manufacturing and services. WPI inflation, however, increased to 10.5 per cent in April 2021 as compared to 7.4 per cent in March 2021 on account of increase in inflation of all major groups, viz, Primary articles, Fuel & power and Manufactured products and base effect.

On the external front, exports grew at 7.9 per cent in May 2021 over pre-COVID May 2019 levels, thereby reflecting export resilience amidst global economic recovery. However, domestic demand prospects remained tentative with imports declining by 17.5 per cent. India emerged as the preferred investment destination, attracting highest ever FDI inflow of USD 81.7 billion during the pandemic year FY 2020-21, particularly in computer software & hardware and infrastructure sectors. Bolstered by resurgent net foreign inflows, easing of the second wave and weakening dollar, the Indian Rupee made a strong comeback in May 2021 to reach INR/USD 72.8 and became the best performing Asian currency in the month.

Money supply continued to rise by 9.9 per cent (YoY) as on 21st May 2021 driven by growth in aggregate deposits. Monthly growth in currency-in-circulation (CiC) which had begun to moderate in the second half of FY 20-21 picked up again in April and May 2021, suggestive of rise in precautionary demand for cash during the second wave, albeit lower than first wave levels. Financial conditions in May 2021 have remained conducive for economic recovery with systemic liquidity in surplus, continued accommodative monetary policy stance - as outlined in June 4 Monetary Policy statement - and unhindered efforts towards smooth policy transmission. To mitigate challenges of the second wave, RBI has further unveiled developmental and regulatory measures to ensure equitable liquidity support for affected sectors and financial stability. Driven by buoyant and broad-based growth in Centre's net revenue collections of 5.9 per cent for 2020- 21 Provisional Actuals (PA) over 2020-21 Revised Estimates (RE) and nearly 5 per cent growth over 2019-20, Centre's fiscal deficit for FY 2020-21 stood at 9.2 per cent of GDP for 2020-21 (PA), 0.3 percentage points lower than RE.

According to the monthly report, rapid vaccination and frontloading of the fiscal measures planned in the Union Budget hold key to invigorating the investment, and thereby consumption cycle in the coming quarters. Healthy monsoon forecasts bode well for continued momentum in agricultural growth. With state-level lockdown restrictions being more adaptive to learnings from the first wave, manufacturing and construction are expected to experience a softer economic shock in the current quarter. Quickening the pace and coverage of vaccination is critical to help India heal and regain the momentum of economic recovery.

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