Second Quarter GDP Numbers Show India Is In Post-Covid Takeoff Stage; Only Threat Is Jumping Xi-Omicron

The second quarter (Q2) gross domestic product (GDP) numbers should have provided us with a very good reason for sunny optimism but for the rising threat of the new Covid variant. The new mutant, dubbed Omicron by the World Health Organization (WHO) instead of Xi — the Greek letter preceding Omicron — is our main threat to economic revival.

Since the virus originated in Wuhan, China, and has been jumping from person to person, country to country, with greater felicity since then, it would have been better named as Jumping Xi, but we will argue about that later. So, let’s start with the good news on the cheery Q2 GDP numbers first.

In Q2 (July-September 2021), the Indian economy finally re-established its old growth base by reporting a slight increase in real GVA (gross value added) and real GDP over the second quarter of 2019-20, two years back. That is the real base for comparison, since last year growth rates nosedived after the lockdowns and economic disruptions. However, we got positive growth in Q3 and Q4 last year (2020-21), and so the base will again change for the next two quarters.

The growth in GVA over Q2 last year is a healthy 8.5 per cent, but only marginally higher than in 2019-20 at 0.05 per cent. In GDP, the growth over 2019-20 is even lower at 0.03 per cent, but that is no mean feat, for it signifies that we now have a new positive base from which to calculate real growth rather than 2020-21’s negative base in the first two quarters. (Note: GDP is GVA plus taxes minus subsidies)

Even more interesting is the growth in terms of current prices, which means real growth plus inflation. GVA rose 10.06 per cent over Q2 in 2019-20 and GDP 12.38 per cent. In current money terms, and ignoring inflation, we are in growth mode. Once inflation is contained or limited to a reasonable level, this growth should be sustainable.

The double-digit growth in current terms is important from a psychological viewpoint, for even though inflation is eroding the value of money in your hands, it seems like a larger amount than before. In terms of consumer psychology, this may not be a bad thing, provided inflationary expectations don’t get embedded. Containing inflation within 4-6 per cent in the next 12 months will be a challenge, especially if Jumping Xi-Omicron proves to be more potent than currently envisaged.

Another positive for now: In dollar terms, with the rupee now depreciating less than before, our dollar GDP has actually done much better.

The rupee was quoted at 70.64 on 30 September 2019, and at 74.23 on 30 September this year, a depreciation of 5 per cent over two years. Our GVA and GDP increase in current money rose 10-12 per cent, which means the overall GDP in dollar terms is much better than what our rupee growth rate indicates.

This implies that if we contain inflation and continue growing at 12-15 per cent in nominal terms over the next few years, we will be a $5 trillion economy within two years of the targeted year of 2024-25.

The big unknown is how the Jumping Xi virus, Omicron, and future mutations will impact the world, and — more importantly — how we respond to it.

What gave particular edge to the growth impetus in Q2 was the strong revival in services, but services GVA in Q2 was still 3 per cent lower in real terms than in the comparable period of 2019-20. This is the potential bad news, for if Omicron proves to be troublesome, the revival in services can start tapering off again. Services are high-touch sectors, and the virus will impact services more than agriculture or manufacturing.

This is thus what we must do to prevent the Jumping Xi-Omicron virus from overwhelming our growth impulses again.

First, we must act on the assumption that the virus is already in India (it surfaced months ago, and the chances that no one has it in India so far is close to zero).

Second, our approach must be to test, track and treat the people infected, and not start imposing lockdowns, even in smaller containment zones. While quarantines are difficult to enforce and police, especially home quarantines, we must still do so with community help. Lockdowns should be exceptions and must be imposed in limited areas only when some clusters have very high concentrations of infected people.

Third, we must do more genomic sequencing in vulnerable clusters to ensure that the new infections are the known Delta variant, and not Jumping Xi-Omicron. Early reports suggest that new mutant may not be the scourge that Delta or other variants became, but we need to act on the presumption that it could spread fast — and spread fear and economic negativism in the process.

Fourth, this time, assuming we are not shutting down anything, including schools and public transport, the focus must be on disproportionate investment in healthcare (including vaccinations and discovery of better vaccines and cures), and massive short-term expansion in public transport, especially bus services. Over-crowding can only be prevented if we have more buses on the road. And, of course, we must accelerate the vaccination process between now and January 2021.

Fifth, the usual gyaan — masking, hand washing, etc — must become accepted wisdom everywhere.

India’s economic revival will be for real only when we have defeated the Jumping Xi Omicron virus. We have to carry on till we learn to live with the virus, and vice versa.