Capital gains


According to the Ministry of Statistics and Programme Implementation, India’s gross domestic product grew by 8.4 per cent in the second quarter of the current financial year. In absolute terms, at Rs 35.74 lakh crore, India’s Q2 GDP crossed the pre-Covid level of Rs 35.62 lakh crore in Q2 of 2019-20. On the expenditure side, what is most promising is the 11 per cent growth in gross fixed capital formation (GFCF) — a sharp recovery after a 9 per cent contraction in the same quarter last year. The GFCF is the marker of investments in the economy and high growth in investments suggests businesses are looking favourably at India’s growth prospects. In fact, in absolute terms, the investments in Q2 are the highest of any Q2 in the past five years.

However, there are still several areas of concern. The biggest worry is the weak growth in private consumption expenditure. This is the biggest engine of GDP growth in India and after contracting by over 11 per cent in Q2 last year, it has grown by just 8.6 per cent this year. As a result, private expenditure in Q2 is still well below the 2019-20 level. This is significant because growth in investments cannot be sustained without the growth in private consumption expenditure. Typically, in times of such a mismatch, the government steps up its expenditure to boost overall GDP. But in Q2 this year, the government’s expenditure was quite low. After contracting by 24 per cent in Q2 last year, it has risen by just 8.7 per cent this year. As a result, the government’s quarterly spending in current Q2 was the lowest in any Q2 of the past five years. On the supply side too, there are areas of concern. On the face of it, the growth rates of the gross value added (GVA) by different sectors look decent — construction by 7.5 per cent, trade and hotels etc. by 8.2 per cent and financial services by 7.8 per cent. But most of these sectors contracted much more heavily in Q2 of last year. As a result, despite decent GVA growth rates, in absolute terms, many of them are below the levels set in pre-Covid years.

Overall, the latest data points to a fledgling economic recovery. While investment growth is heartening, private spending is a cause of concern. Moreover, the fiscally conservative approach of the government not only goes against the idea of a counter-cyclical fiscal policy that even its most recent Chief Economic Advisor, Krishnamurthy Subramanian, argued repeatedly but also undermines the broader economic recovery. As things stand, India’s GDP in the first half of the year is still 4.5 per cent below the GDP in the first half of 2019-20. With the threat of another virus variant in the air, the government must step up its expenditure to ensure that the growth in investment is sustained.

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