Economic data released over the past few weeks holds hopes of recovery for India. While we believe that overall economic contraction continued in the second quarter of this fiscal, in all likelihood, it was less severe than the first. That creates an upside to our second-quarter gross domestic product (GDP) forecast of -12%.

In September, we had also noted that risks to the full fiscal growth forecast of -9.0% were tilted downwards. But now, the risks to this outlook appear to have evened out. That said, the more upbeat economic performance and fiscal outlook for the second half will be far short of what is needed to erase the effect of deep recession in the first. Moreover, we are not out of the woods yet. A second Covid-19 wave coupled with income uncertainty and high retail inflation could throw a curveball in the positive trend in indicators we are currently witnessing

In view of these, it would be prudent to wait for some more incoming data, to assess if the current momentum shows signs of sustenance beyond the pent-up demand, and also watch the path of the virus post festive season before revising growth outlook.

Since the pandemic struck, we have seen that national-level trends mask inter-state variations in spread of the virus as well as economic momentum. Different states are seeing peaks and troughs at different points in time. 

Our study of the spatial and temporal dimensions of the pandemic’s impact, using a framework that considers the extent of shock and resilience of states based on their economic structure, reveals that: 1) agriculture-dominated states have been impacted to a lesser extent as agricultural activity was largely unhindered even during the lockdown phase; 2) states with larger share of services in their GDP are showing weaker recovery; and 3) manufacturing-led states that initially suffered are now benefitting from recovery.

While the second half of the fiscal will look better than the first for all states, the degree of improvement will be shaped by the nature of second wave and economic structure. We expect agriculture- and manufacturing-dominated states, in general, to perform somewhat better than services-dominated ones.

We also expect the current high inflation, a bête noire for policymakers, besides GDP contraction, to soften in the second half as food prices cool and base effect sets in. But this will not be enough to provide comfort to the Reserve Bank of India (RBI) to cut repo rate any time soon. So expect rates to be on hold in the December policy meet.