Without second wave, India may reach pre-COVID growth levels by end-2020: Govt

The movement of high frequency indicators in October points towards a broad-based resurgence of economic activity, notably in healthy Kharif output, power consumption, rail freight, auto sales, vehicle registrations, highway toll collections, e-way bills, a rebound in GST collections and record digital transactions.

"Rural consumption has stayed strong, in part helped by sustained MSP procurement of food grains by government at higher prices. Manufacturing Purchasing Managers’ Index rose from 56.8 in September to 58.9 in October, pointing to the strongest improvement in the health of the sector in over a decade," the government said in its monthly economic review.

Services PMI also rose to 54.1 in October, ending a seven-month sequence of contraction and signalling improved market conditions. With the onset of the festival season, overall consumption is expected to see a further uptick in the coming months enhancing prospects of faster economic normalisation, according to the review.

"A steady contraction of active COVID-19 cases and a low case fatality rate has instilled measured optimism in India that the worst is behind us. At the same time, a second wave of the pandemic in advanced nations is a grim reminder of how reality hits back when caution is compromised," the review said.

The document noted that economic normalisation is also evident in the external sector indicators with consumption of petroleum products increasing in September and exports rebounding strongly with a year-on-year positive growth for the first time in last seven months. October witnessed some moderation in exports growth, primarily driven by weak oil exports.

"The expected current account surplus during the year is likely to provide a cushion to increased spending in the economy. Global investors continue to be upbeat about India’s economic prospects as gross FDI inflows cross $35 billion during April-August, 2020, the highest ever for first five months of a financial year," the review said.

With net foreign portfolio investment (FPI) inflows staying robust in October, the rupee remains strong on the back of forex reserves now comfortably settled in excess of half a trillion dollars.

Food prices have been under pressure but are likely to smoothen out with prospects of a good kharif harvest and reduced supply-side disruptions in inter-state movement of food products, the report said

India’s fiscal space in the pandemic period has been characterised by additional spending social spending. This has been directed towards ensuring a basic means of sustenance and livelihoods for the vulnerable people, relief measures for micro, small and medium enterprises (MSMEs), accommodating additional health infrastructure and services to fight COVID-19 and measures to boost consumption demand.

"The fiscal space is also characterized by recent measures announced to lend to states for increasing capital expenditure, providing them assistance under SDRF and borrowing on their behalf to meet GST revenue shortfall," the review said.

The government's books are also reeling from a pandemic-induced shortfall in revenue collection in the first of half of the fiscal year following the interruption in economic activity. The consequent constriction of fiscal space is neither unique to India nor does it make the country’s public finances any more vulnerable than other nations, the report noted.

"Given that there are indications of India’s GDP growth in the current year being higher than currently projected by various agencies, fiscal space is set to widen to accommodate other priorities of the government," the review said.