India’s real GDP got back to its pre-Covid level in the second quarter of 2021-22. Real GDP during the quarter amounted to Rs.35.7 trillion, 8.4 per cent higher than its year-ago level and 0.3 per cent higher than its corresponding pre-Covid level of Rs.35.6 trillion. This is a significant improvement in the economy’s performance when compared to the first quarter of 2021-22. GDP in the first quarter was 9.2 per cent lower than its pre-Covid level because of the second wave of infections and consequent curbs on mobility and business operations imposed by state governments.

The economy had returned to its pre-Covid level after the first wave of infections too, before shrinking again in the June 2021 quarter due to the second wave. But, the recovery from the first wave was dragged. The economy had remained in the red for two consecutive quarters April-June 2020 and July-September 2020, before returning to growth in the October-December 2020 quarter.

While the economy has quickly recovered from the shock of the second Covid-19 wave, the recovery appears fragile due to its narrow spread. GDP grew largely on the shoulders of investment in valuables and from growth in agriculture and public administration, defence & other services. The contribution of high employment generating sectors construction and trade, hotels, transport & communication in GDP growth was negative, while the contribution of the manufacturing sector to GDP growth was limited. Consequently, consumer demand, which is also known as private final consumption expenditure (PFCE), remained 3.5 per cent lower than its pre-Covid level.

Government, both central and state, did not provide any boost to consumption demand during the September 2021 quarter. In fact, government final consumption expenditure (GFCE) dropped steeply, by 16.8 per cent, in the September 2021 quarter compared to its corresponding pre-Covid level.

Businesses did make new investments during the September 2021 quarter, but not with great enthusiasm. Gross fixed capital formation (GFCF), which is the expenditure incurred on creating assets like buildings and machinery, grew by 1.5 per cent in the September 2021 quarter over its pre-Covid level. GFCF is considered to be the most productive component of GDP as it creates maximum second rung effects for the growth of the economy by generating demand for sectors like steel, cement and other construction items. This, in turn, leads to fresh employment generation, thereby triggering growth in consumption demand. But, growth in GFCF over pre-Covid levels was woefully low at 1.5 per cent. Investments continue to elude the Indian economy.

Investment in valuables i.e. in acquisition of gold, jewellery etc, peaked at nearly Rs.12 trillion in the September 2021 quarter. Compared to the pre-Covid level, it increased by 170.5 per cent. This was nearly the sole contributor towards the GDP growth achieved in the September 2021 quarter over the September 2019 quarter.

PFCE, which is the single largest contributor to India’s GDP, grew year-on-year by 8.6 per cent in the September 2021 quarter. But, when compared to its corresponding pre-Covid level, PFCE was still lower by 3.5 per cent. There are two possible reasons behind this slow recovery in PFCE.

First, consumers were not willing to spend as household income remained weaker than its pre-Covid level even as the second wave of infections started receding. Average household income in July 2021 was still 4.7 per cent lower than its pre-Covid level in nominal terms, according to the findings of CMIE’s Consumer Pyramid’s household survey. In real terms, i.e. when adjusted for retail price inflation, the income was down by a much steeper 12.9 per cent. The same survey indicates that consumer sentiments in July 2021 were 50.3 per cent weaker than their pre-Covid level. These continued to remain weak (47-49 per cent lower) in the following two months.

The second reason for the slow recovery in PFCE is the non-availability of adequate avenues to spend. Restrictions on mobility and business operations were phased out gradually post the second wave of Covid-19. Restrictions on operations of hotels, restaurants, malls, cinema halls and transport were still there in some states in the better part of September 2021 quarter. Most educational institutions functioned only online during the quarter.

As nearly all restrictions on mobility and business operations were phased out, the pent-up consumption demand for goods and some services got unleashed during the festive season in the December 2021 quarter. But, a bulk of spending on daily activities such as intra-town travel to work, regular visits to tea vendors, restaurants, salons, etc, which could not take place due to partial restrictions in the September 2021 quarter has been lost forever.

The Indian economy thrived on exports during the first and the second wave of Covid-19 as demand, both consumption and investment, tanked in the domestic market. This cushion that the Indian economy got from the external trade is no longer available. Even as exports have retained their buoyancy, imports have started rising too, and at a faster pace. In the September 2021 quarter, exports of goods & services grew by 17.2 per cent compared to their pre-Covid level and imports grew by 15.5 per cent. Trade deficit, in real terms, widened to a nine-quarter high of Rs.1.37 trillion, thus eating into India’s GDP growth. Trade deficit during the September 2021 quarter amounted to 3.8 per cent of GDP, the highest since June 2019.

The failure of PFCE to rise above pre-Covid levels, the poor growth in GFCF and the simultaneous extraordinary growth in purchase of gold and other similar valuables reflect weaknesses of the growth registered in the quarter ended September 2021.