The GDP data for the first quarter of the current fiscal ending June did not make for a good reading.
The economy shrank by about 23.9% in the period from April to June. While many had expected a steep fall given that the economy had come to a standstill in two of the three months — April and May, the question is how long will it take for the economy and to recover and what are the factors that will affect the recovery.
To begin with experts expect a negative growth for the full fiscal ending March 20210. Many have pegged the contraction to be about negative 6%, as they expect the second quarter GDP also to be lower than a year ago, with some semblance of growth visible from the third quarter.
According to the RBI, economic activity hit a bottom in June. It expects positive growth only in the fourth quarter ending March 2021.
The recovery will, however, depend on some key factors.
First, of course, is the way the ‘unlock’ is unfolding.
The Centre has removed the most COVID restrictions, except perhaps those on cinema halls and educational institutions, which has helped economic activities to resume. However, for growth to kickstart, it is necessary that even state governments remove all blockades. As long as there are local lockdowns and containment zones, the free movement of goods and services will remain affected, hurting the prospects of a quick recovery.
So, while data, such as those of car sales in August and also the IIP data for the month have shown encouraging signs, the fact remains that all blockades, however small, have to go before the economy can begin to fire on all cylinders.
But even then any growth will remain unsteady without government intervention.
While the Centre announced a Rs 20 lakh crore package in the middle of the pandemic, that was more a step towards helping those severely affected by the crisis and cushion the shock caused by the pandemic.
What is now needed is a stimulus package that could boost capital expenditure and revive consumption, one of the key pillars of the Indian economy.
Many experts believe the revival should be led by government spending as companies already under severe strain due to the shock to the economy try to wade carefully to avoid any missteps and conserve resources. The government is likely to focus on infrastructure spending to rebuild the economy, as this will not only ensure greater private participation but also prove jobs.
“Targeted public investment funded by monetisation of assets in steel, coal, power, land, railways and privatisation of major ports by central and state governments under an independent regulator can be the way forward to revive and crowd in private investment,” the RBI said in its annual report.