Indian economy expands 20.1% in first quarter as pandemic curbs ease

Manufacturing sector grows 49.6% a year, up from 6.9 per cent in the previous quarter

Labourers at a wholesale market in Kolkata. India's economy expanded by more than 20 per cent in the April-June quarter. AFP

India's economy rebounded in the April to June quarter as a surge in manufacturing and higher consumer spending drove a 20 per cent year-on-year expansion despite a devastating second Covid-19 wave that swept the country.

The expansion, however, fell short of the 21.4 per cent predicted by the central bank, which some analysts said would make the Reserve Bank of India more likely to retain its accommodative stance until, at least, the end of the year.

Gross domestic product expanded by 20.1 per cent annually from April to June, the first quarter of India's fiscal year, driven mainly by manufacturing and construction, the statistics ministry said on Tuesday. That was in line with a Reuters poll forecast of 20 per cent.

The country's GDP suffered a record contraction of 24.4 per cent in the same quarter of 2020.

The second wave of the coronavirus pandemic struck in April and May this year. However, less stringent pandemic containment measures meant that the economy was not affected as much as it was during last year's initial spread when India imposed some of the strictest lockdown measures globally.

The Indian economy, Asia's third-largest, shrank 7.3 per cent in the 2020-2021 fiscal year, putting it among the worst-hit major economies.

The government's chief economic adviser, K.V. Subramanian, said private investments and consumer spending were driving a V-shaped recovery, and that the economy was well placed to deal with the effect of any move by the US Federal Reserve to tighten liquidity.

"India is poised for stronger growth," he said, citing government reforms and the easing of inflationary pressures.

However, he said that certain services were still not experiencing "green shoots".

While advanced economies have provided massive stimulus to support consumption, Indian Prime Minister Narendra Modi opted to raise infrastructure spending, pursue the privatisation of state companies and tax reforms to bolster growth prospects, and also provide free food grains to the poor.

The RBI, which has kept its monetary policy loose, has forecast annual growth of 9.5 per cent in the current fiscal year while issuing a warning on the possibility of a third pandemic wave.

Consumer spending, the main driver of the economy, rose 19.34 per cent a year from April to June period, compared with a year ago, but remained lower than its pre-pandemic level.

Investment rose by 55.3 per cent, compared with growth of 10.9 per cent in the previous quarter, while state spending contracted 5 per cent after growing 28.3 per cent from January to March, data released on Tuesday showed.

The manufacturing sector's annual growth stood at 49.6 per cent in the April-June period, up from 6.9 per cent in the previous quarter, and showed that new measures to curb the spread of Covid-19 had only a limited effect on activity.

Many analysts said the risk of a steep rise in Covid-19 infections caused by the Delta variant and the sluggish pace of vaccinations in some states could slow down momentum, with the economy unlikely to return to its pre-pandemic size of about $2.9 trillion before the middle of the 2022-2023 fiscal year.

"Vaccination progress will be crucial, given the possibility of a third wave of infections and the experience of countries which witnessed it," Sreejith Balasubramanian, an economist at Mumbai-based IDFC AMC, said.

Retail, automotive sales, farm output, construction and exports have all picked up since June, supporting the government's claim of a fast recovery, but spending in sectors such as transport and tourism remains weak.

Many forward indicators remain below pre-pandemic levels, said Shashank Mendiratta, an economist at IBM in New Delhi.

"With substantial slack still in the economy, continued policy support will be required to get activity back to normality," he said.