Economy

FinMin sees growth taking a hit in Q1 from the 2nd wave

The Finance Ministry fears a downside risk to economic growth in the first quarter of the current fiscal from the Covid second wave.

A report put out on Friday by the Ministry’s Economic Affairs Department said: “With the second wave of Covid-19 infections forcing localised or State-wide restrictions, there is a downside risk to growth in the first quarter of FY22.” However, it said that the impact is expected to be more muted compared to the first wave. “The experience from other countries suggests a lower correlation between falling mobility and growth as economic activity has learnt to operate ‘with Covid-19’,” the report said.

Forecasts tempered

These remarks follow tempering of growth forecasts by many agencies for the current fiscal year. On Thursday, Fitch projected India growing at 9.5 per cent with a downside risk in FY22. Earlier, S&P said that the second wave can derail a strong recovery and dent growth projections up to 2.8 percentage points. Its latest forecast is 8.2-9.8 per cent for the current fiscal.

In April, though the second wave moderated the momentum of economic recovery, agriculture continued to be the silver lining with record foodgrain production expected with another normal monsoon predicted. Rural demand indicators like tractor sales were robust in March compared not just to the same month of 2020 but even over 2019.

Though the RBI has not revised its projections, it has pointed to mixed signals from the high frequency indicators. “The RBI will closely and continuously monitor all incoming data to assess on a real-time basis the impact of the second wave on macro-economic and financial conditions,” Governor Shaktikanta Das said earlier this week.

Weak consumer confidence

Highlighting the current economic situation, the Finance Ministry report drew attention to RBI surveys showing weakened consumer confidence in March on the back of deteriorating sentiments on the general economic situation, incomes and prices. Respondents, however, expressed optimism for the year ahead, reflected in the Future Expectations Index (FEI); one-year-ahead sentiments on all major parameters, except prices, remained positive.

Businesses optimistic

According to the RBI surveys, with higher essential spending by most consumers, the overall expenditure was up and expected to rise despite the continuing moderation in discretionary spend.

The RBI’s 28th round of Services and Infrastructure Outlook Survey (SIOS) in January-March 2021 indicated some moderation in the overall business situation in the fourth quarter of FY2 after a strong recovery in the third.

But “respondents exuded optimism regarding the business situation, employment conditions and turnover for Q1 to Q3 of FY22,” the Finance Ministry report said.

 

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