Explained: Even as Omicron threatens recovery, India is poised for a growth revival

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India’s gross domestic product (GDP) is expected to grow more than 9.5 per cent in FY21-22, according to SBI research report-Ecowrap. The economy grew at 8.4 per cent in the second quarter of the current fiscal, according to data released by the National Statistical Office (NSO) on Tuesday. The April-June quarter growth of this fiscal stood at 20.1 per cent.
During the monetary policy review in October, the Reserve Bank of India retained its projection for real GDP growth at 9.5 per cent in 2021-22.
“We believe that the real GDP growth would now be higher than the RBI’s estimate of 9.5 per cent, assuming the RBI growth numbers for Q3 and Q4 to be sacrosanct, the SBI research report said. The real GDP growth may be near to 10 per cent, it added.
Omicron scare
However, it cautioned that echoes of the fast-spreading latest virus strain, Omicron, declared a ‘variant of concern’ by an edgy WHO seem to have reignited the worst fears of multiple nations, more so in view of the increased chances of reinfection posed by its 30-plus strains, even while researchers are frantically upping the ante to confirm the seemingly enhanced levels of transmissibility and severity of infection against effectiveness of vaccine doses administered.
Even Goldman Sachs in a note on Tuesday flagged omicron as a potential source of uncertainty. There is a risk of a potential increase in restrictions in the first half of 2022, to contain the spread of the new omicron variant, Goldman Sachs analysts said..
The SBI report said that GDP grew 8.4 per cent in Q2 FY22 on the back of double-digit growth in mining and quarrying, public administration, defence and other services.
In the first half of FY21, the country exhibited a real GDP loss of Rs 11.4 lakh crore (on a year-on-year basis) due to complete lockdown in April-May and partial lockdown in June-September, it added. The situation has improved in FY22, and in the first half of FY22 the real gain was around Rs 8.2 lakh crore.
“This indicates that real loss of Rs 3.2 lakh crore still needs to be recouped to reach the pre-pandemic level,” the report said.
Most affected sectors
Trade, hotels, transport, communication and services related to broadcasting are still the most affected, and the real loss of Rs 2.6 lakh crore has to be recouped in these sectors, it noted.
Overall, the economy is still operating at 95.6 per cent of the pre-pandemic level (with trade, hotels, transport, communication & services related to broadcasting still at 80 per cent) and should take one more quarter to recoup the losses.
What about agriculture?
Agriculture remained unscathed from the pandemic. The sector grew 4.5% in Q2 FY22 (same as Q1 FY22) as against
3.0% in Q2 FY21.
And industry?
Industry was the worst affected during the pandemic and rebound sharply in Q2 FY22 (grew by 6.9%) due to 15.4% growth in ‘Mining & quarrying’, 5.5% growth in Manufacturing and 7.5% growth in construction.
Services grew 10.2% on year and 16.2% on quarter. A significant QoQ growth of 24.9% and 24.7% has seen in ‘trade, hotels, transportation’ and ‘Public administration and defence’ respectively. But ‘financing, insurance, real estate & bus Services’ QoQ growth declined to 7.0% in Q2FY22.
Investment revival?
The report said the new investment announcements in the current year looks encouraging, with around Rs 8.6 lakh crore investment announcements made so far in the last seven months of FY22. With the private sector contributing around 67 per cent of this i.e. Rs 5.80 lakh crore, it seems private investment revival is on the horizon, the SBI report added.
Not everyone is buying into this revival story:
However, not all are convinced about this investment revival. “Demand and investments are yet to see a meaningful and durable pick-up. Improvements are expected to be limited and gradual given that even before the pandemic, the domestic economy was grappling with low demand and subdued investment climate,” said CARE Ratings’ economists Madan Sabnavis and Kavita Chacko in a note. They retained their GDP growth forecast for the year at 9.1%.
The Organisation for Economic Co-operation and Development (OECD) on Wednesday revised India’s GDP growth forecast for 2021-22 downwards by 20 basis points to 9.7 per cent citing still persisting risk of lasting costs from the pandemic.
Uncertainty over employment and earnings prospects will slow down the revival of households’ consumption. Growth, moreover, will be uneven: rural areas are struggling to absorb the huge flows of migrant returnees, while on the supply side the buoyancy of manufacturing boosted by the Production-Linked Incentive scheme contrasts with the slow return to normalcy of contact-intensive services. The economic outlook in FY 2023-24 is projected to deteriorate due to the lingering negative legacy of covid-19 on key growth-drivers such as business investment in new machinery,” it said in a report.
What about inflation?
The global energy crunch which began in Europe and Asia will likely continue into the first few months of 2022. According to data analytics firm, Dun & Bradstreet, there will be a partial pass-through of price rise at the factory
gate level and eventually into core inflation. Alongside, surge in commodity prices, shortage of raw materials, high logistics costs and rebound in demand are also expected to fuel inflationary pressures. Dun & Bradstreet expects Consumer Price Inflation (CPI) to be in the range of 4.8% – 5.0% and Wholesale Price Inflation (WPI) to be around 12.4% – 12.6% in November 2021.
“The aftershocks of the pandemic are casting shadows even over the brightest prospects of recovery across countries, including India. Supply chain shocks can act as a drag on external sector demand and is adding to the inflationary pressures which can impact India’s growth story. Furthermore, growth remains uneven across sectors and across regions,” said Dr Arun Singh, Global Chief Economist, Dun & Bradstreet.
Ray of hope
Nonetheless, there are many positives to the India growth story. Investor optimism, both domestic and foreign, augurs well for the economy. Easing lockdown restrictions have unleashed the delayed demand which is driving the optimism level of businesses. As per Dun & Bradstreet’s survey, the consumption boost to India Inc. had driven the optimism level of businesses for new orders for Q4 2021 to the highest level since Q3 2014, added Singh.

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