On 23 March this year, this writer predicted that India is facing its first full-blown recession in four decades. That prediction has come true with the announcement of the second quarter GDP numbers yesterday (27 November), which show that the April-June GDP fall of 23.9 percent has been amplified by a further fall of 7.5 percent in the July-September quarter.

Two back-to-back quarters of negative GDP growth constitute a formal recession, but the surprise is the sharp bounce-back in the second quarter, which implies that economic activity is gradually returning to near-normal levels in many sectors.

A close look at sectoral growth figures shows a sharp uptick in gross value added (GVA) in the second quarter, except in “public administration, defence and other services” and the financial sector. (GVA is GDP plus subsidies minus product taxes).

While agriculture maintained its healthy 3.4 percent growth of Q1 in Q2, the sharpest turnarounds have been in manufacturing (-39.3 percent in Q1 to a positive 0.6 percent in Q2), and in electricity, gas, water supply and other utilities (from -7 percent to a positive 4.4 percent).

The most heartening pullback has been in construction, one of the biggest creators of informal jobs, from -50.3 percent to -8.6 percent, and in trade, hotels, transport and communication services, which lifted itself from -47 percent to -15.6 percent.

Though these sectors are still reporting negative growth, the bounce-back suggests that if the Covid situation does not worsen in the current quarter and the next, when winter and slippages in public safety behaviour could become issues, India will again see positive growth.

The recession can officially be declared as ended in September 2020.

More interesting are the numbers on real GDP and nominal GDP. Here the gap between between Q2 in 2019-20 and this year is narrower, with the drop being just -4 percent (against -7.5 percent in real terms).

Taking the first half year (H1) together, the drop in real GDP is -15.7 percent while nominal GDP fall is -13.3 percent. Clearly, the first quarter lockdowns were the real growth killers.

The question of whether we needed those draconian measures or not can only be a matter of conjecture and political rhetoric. India’s overall performance in the pandemic is not something to be sorry about, with active cases well below half a million today, against nearly 9.35 million cases.

The current money value of GDP in H1 is Rs 85.30 lakh crore; last year it was Rs 98.38 lakh crore – an inflation-unadjusted gap of just over Rs 13 lakh crore.

This is the gap the economy has to make up in the remaining two quarters to reach last year’s GDP number of Rs 203.4 lakh crore, assuming the third and fourth quarter retain at least last fiscal’s nominal GDP figures.

If nominal GDP numbers are much higher, the total negative real growth may be much lower than most forecasters had warned us about. Macroeconomists will surely have egg on their faces in May 2021, when those numbers come out.

What the sharp differences in nominal and real GDP output numbers signify is the return of the economy to short-term inflation, thanks to the supply side disruptions of the first half of this fiscal, and the revival of pent-up demand towards the end of the first half and the beginning of the second half. It was probably a good call on the part of the Modi government to not opt for a broad-based demand stimulus a bit too soon since it would have sent inflation to an even higher trajectory in the short run.

The way forward in thus a stronger sector-specific stimulus, and a milder form of demand stimulus. If the economy continues on its revival path, and the schemes of Atmanirbhar Bharat (including the production-linked incentives schemes) stimulate a pick-up in investment demand, and the budget in February 2021 provides a modest demand stimulus, we will be back to a virtuous cycle of rising investment, rising demand, and faster growth.

The allegation that the Modi government has mismanaged the economic situation post-Covid is simply not borne out by the Q2 GDP number or the massive reforms package unveiled during the Covid pandemic.

Two additional points can be made.

One, the return of inflation, despite its negative effects on real incomes, may well aid a sense of improved well-being as money in hand shows signs of rising. Since most of it is food inflation, it implies agriculture’s improved terms of trade vis-à-vis the non-agricultural sector.

Two, thanks to a lower base year effect, there is now a fair chance that fiscal 2021-22 may be the best year yet for GDP growth during the Modi regime.

Q2FY21

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