Omicron a mere speed breaker for GDP, vaccination drive will quell impact

GDP growth for the second quarter was going to be important from the point of view of the swiftness with which the economy would clock growth of around 9.1 per cent or higher for the full year. The rather vibrant consumer demand story that unfurled around September was the starting point of this optimism considering that the services sector was opened up with alacrity subsequently in October and November.

GVA growth at 8.5 per cent is impressive, though it comes over a negative base effect. However, when compared with growth in say Q2FY20, which was 4.6 per cent, this number would mean that we are ahead of the pre-Covid period. But GDP growth over Q2FY20 is marginal at just 0.3 per cent. This is indicative that there is some space to cover before we are back to pre-Covid levels.

The downward trajectory across the four quarters will be the norm going ahead as the base effect gets diluted. Hence this growth rate cannot be compared with 18.8 per cent growth witnessed in the first quarter. All high-frequency indicators such as tax collections, eway bills, PMIs, and trade data point to the recovery in progress. Therefore, there is reason to believe that the economy is on the right path. This data along with the financial performance of companies has been taken into account while calculating the growth numbers in sectors such as manufacturing, trade, transport, communication etc. Besides, the central government accounts which goes into calculations for the public administration/social services component have also revealed buoyancy this quarter.

Omicron is probably the only speedbreaker going ahead on account of the uncertainty of the severity of the new strain which can herald a third wave. We can still be confident that on account of the progress of the vaccination programme that the impact will be less severe and the lockdowns that could be imposed will be less deleterious to economic activity.

The encouraging signs in the second quarter were steady agriculture growth of 4.5 per cent hastened by higher growth in manufacturing (5.5 per cent), construction (7.5 per cent), trade, transport (8.2 per cent), financial services, real estate etc. (7.8 per cent) and public administration etc. (17.4 per cent). The steady growth in foreign trade has also contributed to the growth process as the allied services have received a boost. Interestingly in absolute terms GVA in construction and trade, communication, hotels etc. was lower relative to Q2-FY20.

While the non-services segments are expected to accelerate in Q3 and Q4, the omicron effect can play a role in guiding growth of services. The government is already reconsidering its decision on permitting all international flights to resume and it needs to be seen how things progress on this end. In case there is spread of the virus, there could be restrictions placed on the services sector once again which will pose challenges for future growth.

Q2 is not the time when there is new investment taken on in a big way especially in the construction and hence the gross fixed capital formation rate of 28.4 per cent must be viewed against this background. The signals received from companies in their Q2 financial calls do suggest that there are strong intentions on expanding their capacities which should materialize by the end of the year. Growth in consumption has been steady and may be expected to show buoyancy in the coming quarters as the pent-up demand story plays out.

The interesting factor here is the difference between the GDP growth numbers in nominal and real terms which is reflective of the inflationary tendencies in the market. The difference is much as 9.1 per cent which is a concern.

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The author is Chief Economist, CARE Ratings. Views are personal.

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