The Indian economy appears to have turned the corner. After two consecutive quarters of contraction, it grew by 0.4 per cent in the third quarter of the current financial year, according to the second advance estimates released by the National Statistical Office. While these estimates do indicate a marginal contraction in the fourth quarter, it is likely to be statistical aberration, driven perhaps by the back-ended release of the Centre’s subsidy expenditure as detailed in the Union budget. Gross value added by the economy, which excludes these payouts, is expected to grow by 2.5 per cent in the January-March quarter, up from 1 per cent in the October-December quarter, signalling a return to pre-pandemic levels in the second half of the financial year, after an almost 15 per cent contraction in the first half.

The sector wise disaggregated data shows that the agricultural sector continues to exhibit healthy growth. It grew by 3.9 per cent in the fourth quarter, and growth for the full year is expected to touch 3 per cent — it’s the only sector, barring electricity, gas and water supply, to register positive growth for the full year. Within the industrial sector, both manufacturing and construction have witnessed an uptick, the latter rebounding stronger. But this is likely to have been driven by the larger firms, with the smaller ones continuing to struggle — indicative of the heavily lopsided nature of the recovery. Moreover, as the index of industrial production suggests, volume growth continues to remain muted. Within the services sector too, the pace of recovery remains uneven. While the financial, real estate and professional services segment has rebounded strongly, the labour intensive trade, hotels, transport and communication parts of the economy continue to contract. Though the pace of contraction has moderated, it is indicative of continuing challenges faced by contact intensive segments. Household spending remained constrained, notwithstanding the pick up during the festive season, reflective of job and income losses. Investment activity, though, appears to have fared better, despite subdued private activity. After contracting by 27.5 per cent in the first half of the year, investment activity is expected to rebound in the second half, growing by 2.7 per cent. The uptick appears to be driven by government spending — capital expenditure by the Centre more than doubled in the third quarter.

But there are several areas of concern. For one, as these numbers do not adequately reflect the stress in the informal economy — it is likely to have fared worse than the formal sector — it is difficult to know the extent of recovery in that part of the economy. Two, an uptick in COVID-19 cases in the past few weeks in some parts of the country has raised fears of localised lockdowns impacting economic activity. Much will depend on how quickly the vaccination programme is rolled out. Three, one must also be cautious in interpreting the growth numbers in the coming quarters, especially the first half of next year, as they are likely to be distorted due to the base-effect. Beyond that, uncertainty persists over the medium term economic outlook.