India’s growth in the first quarter of the current financial year is likely to be “the worst” among the four quarters of fiscal year-21 due to economic disruptions caused by the Covid-19 pandemic, according to a report by EY India that indicates a better economic performance since the second quarter.
“High-frequency indicators for India are giving positive signals after the first two months of the pandemic,” the consultancy said in its latest edition of Economy Watch ahead of the scheduled release of official gross domestic product (GDP) data on Monday.
The optimism of the report is based on indicators such as the Purchasing Managers Index (PMI), the Industrial Production Index (IIP), passenger car sales, energy consumption and the increase in foreign exchange reserves.
“In June and July 2020, the manufacturing PMI was close to the benchmark level of 50 at 47.2 and 46.0 respectively. Although the IIP has continued to contract in June 2020, its rate of contraction has dropped to -16.6% from its May 2020 level of -33.9%. In June 2020, passenger vehicle sales rebounded sharply with sales of 1,20,188 units compared to sales of 33,546 units in April and May 2020 taken together, ”he said.
Although energy consumption shows a continuous contraction, the contraction rate has been decreasing in successive months since April 2020, when it was at -25%. This fell to -0.4% in the first 20 days of August 2020, it added. He also noted that foreign exchange reserves continued to rise steadily to reach a level of $ 538 billion by August 7, 2020 as a positive indicator.
DK Srivastava, Senior Policy Advisor at EY India, however, said that an adverse development is the slowdown in bank credit growth to 5.8% in the fortnight ending July 17, 2020. “Due to moderate demand , average credit growth fell to 6.4% in the first quarter of fiscal year 21 compared to 7.1% in the fourth quarter of fiscal year 2020, ”he said.
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It said the center’s capex grew 40.1% in the first quarter of FY-21 compared to a -27.6% contraction in the corresponding period of the previous year, indicating an anticipated distribution of spending from capital by the Union government, which is “welcome as it indicates investment in infrastructure” in line with the objectives of the National Infrastructure Gas Pipeline (NIP).
In his Independence Day address on August 15, Prime Minister Narendra Modi unveiled more than Rs 110 million lakh infrastructure projects to boost the economy and create jobs. “To rapidly modernize India, it is necessary to give a new direction to the overall development of infrastructure,” he said, adding that more than 7,000 projects have already been identified under the NIP.
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The report, however, noted an increase in the fiscal deficit. Data from the Comptroller General of Accounts (CGA) published for the month of June 2020 show that the center’s fiscal deficit in the first quarter of fiscal year 21 is already 83.2% of the annual budgeted target. “In terms of magnitude, the fiscal deficit in 1Q FY21 is 53.3% greater than the corresponding magnitude in 1Q FY20. The Center’s revenue shortfall during the first quarter of fiscal year 21 stood at 94.8% of the annual budgeted goal compared to 77.1% in the corresponding period of fiscal year 20, ”he said.
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