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Govt spending saved the day for GDP in June quarter

Private consumption, which has been a key driving force for the country's economy for quite some time, contracted 27 per cent to Rs 14.61 lakh crore in the first quarter of financial year 2020-21

twitter-logoDipak Mondal | August 31, 2020 | Updated 19:42 IST
Govt spending saved the day for GDP in June quarter
Going forward, government will have to the take the tough call of choosing between consumption and investment

The first quarter GDP numbers would have been far worse if not for the government final consumption expenditure, which saw its highest growth in five quarters at 16.4 per cent during the this period.

The government consumption expenditures in the quarter was Rs 4.86 lakh crore compared to Rs 4.18 lakh crore in April-June quarter last year. Consequently, its contribution to the GDP grew 6 percentage points to 18 per cent in the first quarter of 2020-21, compared to 11.8 per cent in corresponding quarter previous year.

"Government final consumption expenditure recorded a five-quarter high expansion of 16.4 per cent in Q1 FY21, preventing an even deeper de-growth in the overall GDP. Excluding government final consumption expenditure, GDP contracted by nearly 30 per cent in Q1 FY21, highlighting the harshness of the economic situation during the COVID-19 crisis," says Aditi Nayar, Principal Economist, ICRA Ltd on the latest GDP data.

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Private consumption, which has been a key driving force for the country's economy for quite some time, contracted 27 per cent to Rs 14.61 lakh crore in the first quarter of financial year 2020-21, compared to Rs 19.93 lakh crore in corresponding quarter last year.

Experts see the sharp contraction in private consumption as a bigger challenge for the economy. "The magnitude of the (economic) challenge is highlighted by the significant weakening of private final consumption expenditure. This has a weight of close to 60 per cent in overall demand while it shows a sharp contraction of 27 per cent. Without stimulating private consumption and investment demand, it may be difficult to arrest this downward momentum," says Dr D K Srivastava, Chief Policy Advisor, EY India

Gross fixed capital formation, which reflects capital expenditure and investment in the economy, nearly halved from Rs 11.32 lakh crore in June quarter of financial year 2019-20 to Rs 5.99 lakh crore in the same period this fiscal. "With sentiment, investment intentions and project completion battered by the lockdown, even as government capital spending grew on a small base," says Aditi Nayar of ICRA.

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The contribution of private and government investments have dropped from 32 per cent in the first quarter of the 2019-20 to 22 per cent during the corresponding period in 2020-21.

Going forward, the government will have a tough task choosing between giving a boost to consumption or investment. "The choice for the government will be on whether the consumption or the investment side needs to be pushed. Given the limited fiscal space and the need to stimulate a more durable growth, the growth recovery will be gradual and is likely to continue into first half of next financial year," says Suvodeep Rakshit, Vice President and Senior Economist at Kotak Institutional Equities.

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