The focus on increased spending on the infrastructure sector could have a multiplier effect on the economy. Yet, the fear of rising inflation could pose a dilemma to the Central Bank.
Deepthi Mathew
February 27, 2021 / 02:50 PM IST
After two consecutive quarters of contraction, the Indian economy entered an expansionary path registering a growth rate of 0.4 percent in Q3 FY21. The figures came more or less on the expected line as most of the high-frequency indicators were pointing towards economic recovery. As per Reserve Bank of India (RBI) estimates, the Indian economy was expected to grow at the rate of 0.1 percent in Q3 FY21. Thus, there was a consensus that India would exit from the technical recession in the third quarter.
GDP by definition is the sum total of consumption, government expenditure, investment and net exports (GDP=C+I+G+NX). Among the four components, consumption demand is considered to be the backbone of the Indian economy, accounting for more than 50 percent share of the total GDP. Consumption demand as measured by Private Final Consumption Expenditure (PFCE) contracted 2.4 percent in the third quarter compared to a contraction of 11.3 percent in the previous quarter. It reflects that demand is slowly picking up. Improving consumption demand is also reflected in the performance of the import sector. The contraction in imports has declined from 18.15 percent in Q2 FY21 to 4.5 percent in Q3 FY21. Similarly, investment demand measured by Gross Fixed Capital Formation (GFCF) registered a growth rate of 2.5 percent in Q3 FY21. It is a welcome sign as the investment demand was lagging behind even before the pandemic induced economic crisis. The contraction in Government Final Consumption Expenditure (GFCE) came at 1.13 percent.
In terms of Gross Value Added, the agriculture sector registered an impressive growth of 3.9 percent in the third quarter. The performance of construction is notable as it registered a growth rate of 6.23 percent. It is the highest growth rate in the last eight quarters, giving a boost to the real estate sector. The manufacturing sector also entered the positive territory with a growth rate of 1.65 percent.
Q3 GDP numbers are quite encouraging. The Budget announcements and the accommodative stance of the RBI could fuel growth in the coming quarters. The focus on increased spending on the infrastructure sector could have a multiplier effect on the economy. Yet, the fear of rising inflation could pose a dilemma to the Central Bank.
Also, the fear of a second wave of the pandemic is another area of concern. However, the vaccination drive by the government could help to negate this fear. Thus, with a supportive ecosystem, the domestic economy would bounce back to the growth track.
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Deepthi Mathew Deepthi Mary Mathew is an Economist at Geojit Financial Services.
