By Roshan Kishore

June quarter GDP growth of 20.1% was slightly lower than expected estimates (21.3% was RBI’s forecast and 21%, that of economists in a Bloomberg poll). The latest GDP numbers are 16.9% and 9.2% less than the March quarter and June 2019 (pre-pandemic level) quarter, respectively. What do the latest GDP numbers tell us about the state of the macro economy? The answer is not so straightforward.

Quarterly GDP numbers come with a lag of two months. In normal times, this is not a problem. But the Indian economy was battered by the second wave of Covid-19 in the months of April and May. The second wave peaked on May 9. Daily new cases are much lower today and India has administered at least one dose of Covid-19 vaccine to more than half its adult population. This, by itself , says too much reliance should not be placed on the June GDP numbers for estimating the current trajectory of the economy.

High-frequency indicators since June, when read along with the latest GDP numbers, point towards a trend which could have longterm repercussions for economic performance. This trend suggests that there are two growth trajectories in the economy. The first is a more resilient formal sector recovery, boosted by tailwinds from removal of mobility restrictions and pent-up demand as well. Indeed, parts of this sector are facing supply-side constraints because of disruption in international value chains.

Then there is the informal sector, which has taken a bigger hit to incomes during the pandemic and is now facing an inflation-driven squeeze on purchasing power. This sector has a much larger share of employment in the economy. While the formal sector can lead sequential recovery for the time being, a prolonged damage to the informal sector can damage long-term growth potential of the economy. Here are three charts which explain this.