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Economy continues to expand; nears pre-Covid levels

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The July data from the IIP shows that economic expansion is happening unabated and experts believe the rally will continue in August 2021 data as well. Indian economy is nearing the pre-Covid levels signifying a V-shaped recovery.


The year of 2020 was a year of economic bloodbath and 2021 is a year of promise. After the good news of robust economic recovery last week now fresh data shows that the industrial output has also bounced back. Fresh data from the Index of Industrial Production (IIP) released by the National Statistical Office (NSO) shows that the industrial output rose by 11.5 per cent in July 2021 as against a 10.5 per cent contraction in July 2020. The lengthy data is evidence to the fact that the sharp rise in the output is led by expansion in the mining, electricity and manufacturing sectors.

Limited restrictions during the second wave helped the economy to do better. The data signifies that the industrial output is now at near pre-pandemic levels. Fervor in the market is high and analysts are now expecting that economic growth will rise further in Coming month and India should be at par with when the pandemic had hit the country. But this growth rate is lower than the 13.6 per cent recorded in June because June growth happened on a lower base of 2020. 

Low base factor will remain for many coming months when a comparison is made with 2020 but what is good is that the economic recovery is going well. 

Fresh IIP data holds that all sectors witnessed high growth due to a combination of the lockdown being withdrawn. Mining grew the most at 19.5 per cent, compared to a contraction of 12.7 per cent in July 2020. Electricity output expanded 11.1 per cent as against a contraction of 2.5 per cent this month last year. Manufacturing, which comprises 77.63 per cent of the IIP, recorded a rise of 10.5 per cent in July 2021 compared to a 11.4 per cent contraction in July 2020.

Speaking about manufacturing, it recorded a handsome growth of 13 per cent in June 2021, and 34.5 per cent in May 2021. As the economy is expanding showing the recovery cycle, the low base will wane away and the growth rates will get reduced in the upcoming months. 

The NSO data revealed one more interesting fact. It says that capital goods output, which means investment, rose by 29.5 per cent in July, compared to 25.7 per cent in June. This is a good sign as growth in capital goods means further expansion of the economy in the near future. But on the other hand, the consumer durables output grew by 20.2 per cent in July, down from 30.1 per cent in June this year. 

What is encouraging is that all the use-based categories other than consumer durables recovered to or above their pre-pandemic levels in July 2021. One more interesting thing is that the manufacturing index in July 2021 (130.9) was nearly as high as the level in October 2020 (132.0) during last year’s festive season. This means India is on the right path. 

Nitish Kumar, an Economist based in Delhi says, “Data over the next 7-8 months will show us whether this activity is sustaining. Coming month is expected to do well, but remember this is the month of good monsoon performance and many of the key activities like construction and mining are hampered by heavy rains.” He is of the opinion that many of the sectors are operating at below capacity level, many at just 70 per cent. This means that even if there is an abrupt increase in demand, the sectors will be able to absorb it. There is less or no expansion of the firms because of lack of demand. Employment and increase in household incomes will happen only when the firms can operate at full capacity and they will expand only when they see a rise in future demand. Hopefully, if the third wave is averted, and the upcoming festive season goes well, the economy may well pass the aftermath of pandemic led stringent lockdowns. 

Another cause of concern for many is that the government expenditure had declined; even the NSO data showed that. It must increase, private capacity is limited. Savings of public households are down, they are under debt, debt level is rising. Anti-cyclical process should step in; it’s parallel to the 2008 Financial Crisis. “There is difference between growth and sustained growth; – government push will lead to the sustained one,” says Nitish Kumar. 

A Resilient Agriculture 

The nation must thank the farmers for they have kept the growth of the agriculture sector upwards even in the worst of the lockdown period owing to Covid. The gross value added in agriculture remained at 4.5% year on year. Agriculture’s performance is again noteworthy because it employs half of all Indians. 

GDP data released recently by the government shows that the agriculture sector has consistently grown since the pandemic has hit. 

Agricultural GDP, or farm growth, was 3.5 per cent in the first quarter of 2020-21. In the second quarter, it declined marginally to stand at 3 per cent. In the third quarter, just before the pandemic swept in, agricultural growth climbed to a record 4.5 per cent.

Although, before the pandemic there were fluctuations in the sector’s growth and had even gone down to about 2 per cent. But despite other sectors taking a dive into negative, agriculture’s growth rate always remained positive. Not just this, the allied sectors also performed well. As a matter of fact, it is easy for a sector to show sharp growth if previously growth was poor. 

But look at agriculture; it grew robustly from an already high base. Experts hold that two reasons could be attributed to such robust performance–one, that direct cash transfers by the Centre and states through schemes provided cushion to rural households and second, the monsoon has been reasonably good for the two consecutive years. 

This year also monsoon is good and a good harvest is anticipated. Actually, more than half of India’s arable lands are monsoon dependent, hence, a good monsoon is a sign of greater agricultural production.

BOX - Cabinet offers Relief to Cash Strapped Telecom Sector

The Union Cabinet has approved nine structural reforms and five procedural reforms in the telecom sector to allow it to get out of the financial challenges and provide better choices to the consumer base. 

The Foreign Direct Investment (FDI) under the automatic route has been increased from 49 per cent to 100 per cent now. The cabinet has also allowed redefinition of the much-litigated concept of adjusted gross revenue (AGR) to exclude non-telecom revenue and a four-year moratorium on players’ dues to the government. Ashwini Vaishnaw, the Telecom Minister, has said that the new changes will bring more players into the market and the looming duopoly between Airtel and Reliance Jio will be averted. These reforms are expected to attract more investment, swift 5G deployment and more employment opportunities and an opportunity to cash-strapped telcos to secure FDI funding as well as bail out of the low cash abyss! 

Index of Industrial Production

The IIP is an index, compiled and published monthly by the Central Statistical Organization (CSO), Ministry of Statistics and Programme Implementation, that shows the growth rates in different industry groups of the economy in a fixed period of time. 

The index is highly composite in nature that groups the industry to understand the growth rate into broad sectors like mining, manufacturing, and electricity and use – based sectors such as basic goods, capital goods and so on. 

The government has recently changed the base year and now IIP is calculated based on the base year of 2011-2012. The eight core industries of India represent about 40 per cent of the weight of items that are included in the IIP.

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