What really is the state of the Indian economy?

India reported its first quarter (April-June 2020) GDP growth numbers for the financial year (FY) 2020-21 on Monday, 31 August. As was expected by many analysts, the Indian economy contracted by 23.9% YoY (year-on-year).

This is the steepest decline in GDP numbers in recent memory and the numbers are sobering when compared to other countries as well. So, is it all doom and gloom on the economic front? Or do these numbers tell only a partial story and the complete picture is markedly different?

India enforced one of the earliest stringent COVID-19 induced lockdowns. Q1 of FY 2020-21 coincided with the most stringent phase of this lockdown.

From an economic viewpoint, the next few months are going to be interesting times as India has the potential to contribute significantly in the global economic revival

- Akhilesh Mishra

Transport, manufacturing, mining, construction, tourism, hospitality, transport, and services, accounting for approximately 65% of the economy, were totally closed down during this period and hence the sharp decline was only natural and to be expected.

Even then, some sectors still witnessed growth, such as agriculture sector, which grew at 3.4% YoY. Other sectors showing positive growth were communication & broadcasting (7.1%), public administration (3.8%), storage (3.5%) and banking (1.2%).

However, the numbers for Q1, reported with a two-month lag, tell only one part of the story. There are two other important pegs which need to be factored in without which, any understanding of the present economic condition would be incomplete.

First, high value indicators available for the month of July and the first half of August, not accounted for in the numbers reported yesterday, clearly indicate that the virtual shut down of the economy is over and different sectors are picking up at varied levels. It is not all green yet, as some sort of restrictions still persist, but steady normalisation of economic activity is clearly underway.

Footfalls at workplaces, parks and transit locations has substantially increased in the unlock 3.0 phase (August). In July, petroleum consumption recovered to almost 90% of the consumption seen in same month last year.

Manufacturing PMI has surged from a low of 30.8 in May to 46 in July. It was still below benchmark 50 but unlock 3.0 in August and further easing in September should push PMI even higher. Now the latest PMI data for August 2020 is available and it stands at 52. This is a five month high and a definite signalling of growth.

Power consumption in July 2020 was YoY lower by just 2.64%. Passenger vehicle sales picked up in July to the highest levels since March. Broadband subscriber growth remained in positive territory in July.

Tractor sales showed a month of sharp improvement (39%) in July, signalling strong demand from the rural economy.

A very good monsoon this year is further expected to make a healthy contribution to the economy, in not just this quarter but also Q3 (October-December) and Q4 (January-March 2021). E-Way Bills, coal production and motorcycle production are some other high value indicators that have shown positive upswing in July.

Foreign Direct Investment (FDI) has been stellar, even in these times of economic stress. Between April to July India attracted almost $22 billion. This is coming on the base of an already very good previous year when India attracted close to $74 billion, its highest ever.

The stock market has been performing spectacularly and in July India was among the top three stock markets among emerging economies with average market capitalisation increasing by 7.7% to $1.9 trillion.

But this is only the second part of the three-part story. The third, and perhaps the most important part is the game changing reforms undertaken in the last few months which will start showing results as the country resumes full economic activity. Consider some of the reforms announced in the last few months.

Freed from over regulation

Fully commercial, private coal mining is now allowed in India, reversing an almost 50-year-old ban. The agriculture sector has been freed from the clutches of over regulation. Private, contractual farming is now allowed reversing an almost seven-decade old policy.

Regulation prohibiting free flow of agricultural produce has been junked and price control regime, except for very few essential items, has been dismantled. The farmers are now free to sell wherever they want and at whatever price they can command.

An almost $15 billion planned investment in the sector will start fructifying in the coming months.

The FDI limit in India’s defence sector, through automatic route, has now been raised from 49% to 74%, thereby ensuring management control for foreign investors and making it attractive for them. On case-to-case basis it can even be 100%.

Largest defence importer in the world

India is the among the largest defence sector importers in the world. A recently announced incentive scheme has provisioned almost $60 billion worth of orders for domestic manufacturing units set up in this sector in the next 5-6 years.

The production linked incentive scheme for electronics manufacturing, which ended on July 31, was a huge success attracting all the top names from the industry, with a combined proposal to produce mobile devices and components of over $150 billion in the next five years and generating almost 1.2 million jobs.

A total of 22 companies applied under the scheme including five international brands — Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron. Of these, the last three are manufactures of Apple iPhones, which has recently started manufacturing its flagship iPhone-11 model from India.

A slew of other reforms in the aviation sector, space and private mining are also going to significantly contribute in the economic recovery. Privatisation of PSUs, with a well-defined policy framework, being done for the first time, is however, going to be most significant and the most eagerly awaited game changer among the recent reforms.

Senior functionaries of the government have indicated that these are the not the only weapons in the economic arsenal and some further action can be expected in the next few weeks and months.

Overall, the economic outlook for the complete fiscal year, 2020-21, therefore certainly looks much brighter when seen holistically. The Economist Intelligence Unit (EIU) forecasts that India will be one of few the countries to recover the fastest from the COVID-19 induced distress.

According the EIU, in Q3, India’s output will be similar to that registered one year ago and that the country will recover to 2019 GDP levels in 2021.

From an economic viewpoint, the next few months are going to be interesting times as India has the potential to contribute significantly in the global economic revival.