Sustainability of economic recovery a challenge

Good news comes in small doses nowadays. The latest data for the third quarter (October to December) of 2020-21 shows gross domestic product (GDP) growth of 0.4 per cent indicating that the economy is finally on the upswing.

The full year will still end with a contraction of 8 per cent, higher than the earlier prediction of 7.7 per cent. Even so, it appears the economy is clawing back to normalcy slowly. There is an inherent fragility, however, in the data despite the unexpected spurt in some sectors like construction, financial services, real estate and even some movement in manufacturing.

It looks like a V-shaped recovery at first glance, but could conceivably disappoint, if positive indicators do not deepen in the next few quarters. One of the biggest uncertainties is the lack of information about the informal sector which is never adequately captured in the official data. This area has been hardest hit by the pandemic and would have been struggling even in the third quarter which has shown a return to positive growth.

The other segment that is continuing to face pain is travel, tourism and hospitality. The data shows a contraction of 7.7 per cent in this sector, a slight improvement from the 15 per cent decline in the previous quarter. There has visibly been some improvement in the restaurant and hotel business from December onwards, but this is only relative to the complete shutdown of the previous months. Many hotels that rely on foreign tourist occupancy are continuing to see vacant capacities, though most are resorting to discounts for the staycations that are so much favoured now by millennials.

The sector was a letdown in the Budget as well. The pre-Budget hopes of a special package for travel and tourism failed to materialise at a time when the industry needed support in a big way. This is a hugely labour-intensive sector and the tepid revival so far has meant continuing loss of livelihoods for millions, including migrant workers.

The Centre for Monitoring the Indian Economy (CMIE) has accurately captured the impact of such job losses in both the urban and rural economies in its recent studies. These show an unemployment rate of 6.9 per cent for February, rising from 6.53 per cent in the previous month.

Hospitality and travel are also among the sectors that are likely to revive quickly in case the current vaccination drive is a success. In fact, the entire process of economic revival is critically dependent on the effectiveness of the vaccination programme and, in turn, the prospect of herd immunity. It may not be a factor affecting the final GDP growth data for 2020-21, which will be available in May this year, but it will have a significant impact on the current fiscal.

In a pandemic year, one must go beyond the usual parameters to predict economic growth. The impact of Covid and whether there will be another surge in March and April has to be taken into account. Mass vaccinations are thus bound to play a role in economic recovery.

The other key element in the growth process is the fuel prices and resultant inflationary pressures. The government took advantage of the collapse in world crude oil prices last year to raise excise duties. It would be difficult to fault such opportunism at a time when other revenue sources had dried up owing to the lockdown. Besides, there was no change then in consumer prices of petroleum products owing to low base rates.

Now things have changed. International oil markets are showing a hardening trend with demand rising and inventories having been drawn down. The Saudi Arabia-led OPEC is continuing production cuts in tandem with other major producers like Russia to ensure that prices continue their upward trend.

India, as the world’s third biggest oil importer, now has the twin worries of a mounting oil import bill in 2021-22 and the prospects of higher inflation due to the pass-through effect of enhanced fuel prices. There is also considerable public outrage over the retail prices of petrol crossing Rs 100 per litre.

A more holistic, long-term approach to resource mobilisation needs to be taken right now on the oil front. The government must cut excise duties on oil products to reduce the burden on the consumer as also to minimise the cascading effect on the economy. Inflationary pressures will build up rapidly owing to high fuel prices even though price rise has so far been contained at around 4 per cent. Industries are already gearing up to raise prices across the board to deal with the impact of soaring fuel rates.

The delicate economic recovery could easily be derailed by a push to inflation at this sensitive juncture. So, it would be wise economics as also politics for the Finance Ministry to cut excise duties to more reasonable levels. States which have similarly been milking oil products by levying high taxes also need to pause and formulate more rational policies.

One of the plus points emerging, however, from the third quarter data is the higher growth in the construction as well as real estate sectors. This augurs well not just for the development of infrastructure but also for employment as these economic segments have always been drivers for economic growth. Much will depend, however, on the growth of government expenditure in the fourth quarter as it will have to pick up pace compared to the first half of the year.

And finally, the marginal recovery has yet to be reflected in small and medium business enterprises which are still in trouble. The manufacturing sector revival of 1.6 per cent is more the result of large enterprises getting back to full operations. Smaller units are still waiting for a bigger pickup in demand. This is again a labour-intensive area and the slow pace of recovery means continuing job losses.

The third-quarter performance has thus shown the economy is out of the trough. But whether it will get back to a rising path in a sustained way is a question dependent on a host of factors, including the progress of Covid-19 and the fate of the vaccination programme.