Indian Economy turned the corner in February but all that crashed in March

The economic activity was set to gather more pace in the month of March as the government’s expenditure and revenue collection both show buoyancy during this period. However, the outbreak of global pandemic COVID-19 has completely negated the recovery process.

New Delhi: After six quarters of slowdown, Indian economy was widely believed to turn the corner in the January-March period in the last fiscal and gather further momentum in the current fiscal. And it turned out to be true as the factory output registered a healthy growth of 4.5% in February, a seven month high.

The economic activity was set to gather more pace in the month of March as the government’s expenditure and revenue collection both show buoyancy during this period. However, the outbreak of global pandemic COVID-19 has completely negated the recovery process.

“There was a certain recovery that was taking place, it could be because of the certain policy measures that the Government of India had taken, that is clearly visible in the IIP numbers,” said N R Bhanumurthy, a Professor of Economics at National Institute of Public Finance and Policy (NIPFP) in New Delhi.

According to the Index of Industrial Production (IIP) Data released today, the factory output registered a healthy growth of 4.5% in February this year, in comparison with the same month last year. The uptick was largely propelled by a strong growth in manufacturing (3.2%), electricity generation (8.1%) and mining sector (10%).

Manufacturing of primary goods and intermediate goods also registered healthy growth at 7.4% and 22.4% respectively. However, all sectors did not do well as production of capital goods, a key component that reflects a demand in the economy, declined by 9.7%. It had registered a decline of 9.3% in February last year as well.

Moreover, the IIP growth for the April-February period in the last fiscal has registered an overall decline of 0.9% in comparison of 4% growth recorded during the same period of FY 2018-19.

Experts attribute the recovery to the stimulus measures announced by finance minister Nirmala Sitharaman in August-September period last year.

In a booster dose for the Industry, Nirmala Sitharaman had cut the effective corporate tax rate to 25.17% and for new manufacturing companies set up after October 1 last year, the effective corporate tax rate was brought down to 17.01%, including cess and surcharges. In addition to this, the government and the RBI had also unleashed several liquidity boosting measures for the crisis-hit NBFCs and Housing Finance Companies.

India’s GDP growth was recorded at 4.7% in the third quarter (Oct-Dec) in the last fiscal, the slowest pace in over six years. However, following the announcement of stimulus measures in August-September last year, several economists believed that the decline in GDP growth had bottomed out in the third quarter and it would pick the pace in the fourth quarter. IIP data released today has confirmed the widely held belief. However, the outbreak of COVID-19 pandemic has turned the situation upside down.

“Post February, we have a completely different situation, whatever mild recovery we have seen, has completely stalled since March,” Professor N R Bhanumurthy told ETV Bharat.

He said the growth would have picked further momentum in March as there is hectic activity in the services sector in March and GST mop up, and government expenditure also goes up during this period.

“Given that kind of behaviour, one would expect that the GDP growth would be around 5% for the year that the NSO had projected but because of the setback in the month of March, it should be close to 4 to 4.5%,” observed Professor Bhanumurthy.

He points out that the stimulus measures announced by the government will have little impact in the economic activity in the last month as it came to a standstill due to the lockdown imposed by the government to contain the community spread of the virus.

Finance Minister Nirmala Sitharaman announced a Rs 1.7 lakh crore PM Garib Kalyan package to insulate more than 80 crore poor people of the country by giving them staple food, fuel and some cash in their hands for a period of three months.

The Reserve Bank also unleashed its firepower by cutting the benchmark lending rate by 75 basis points at the end of last month. The RBI also announced several measures to boost liquidity in the market. It also relaxed the Ways and Means Advances (WMA), Overdraft limit for the Union and States to help them spend more to tide over the difficult time. But that may not be enough.

“There might be some increase in the expenditure on the government side but I don’t think that it would have led to any increase in the demand condition in the economy,” said Professor N R Bhanumurthy who has closely tracked macro-economic indicators and government finances.

(Article by Krishnanand Tripathi)