India’s success in checking the spread of Covid-19 infections and a strong vaccination drive could drive Q2 (FY22) GDP to 8.1 per cent and the FY22 GDP growth in the range of 9.3-9.6 per cent. This is the projection made by this week’s Ecowrap, a report by SBI’s Economic Research Department.

The analysis suggested that “India remained unscathed in Q3 from the global situation, which is marred by supply disruptions, stubborn inflation and surges of infections during Q3 2021.”

As per the report, India has recorded only an 11 per cent increase in Covid-19 cases during Q3 this year the second lowest among the top 15 most affected countries.

In comparison, the report says that the increase in Covid-19 cases has declined to 2.3 per cent in November against the September figures.

The other positive development that will help boost Q2 GDP is that by Saturday last week, 115.79 crore vaccine doses had been administered in the country, with 81 per cent of the eligible population receiving at least a single dose and 42 per cent of the eligible population getting both the doses.

The report says that in certain states, including Himachal Pradesh, Gujarat, Uttarakhand, Kerala, Karnataka, Telangana and Madhya Pradesh, more than 50 per cent of the eligible population has been fully vaccinated.

Juxtaposing the gains in the battle against the pandemic that brought an economic downturn last year, the report has forecast India’s GDP growth for Q2 FY22 at around 8.1 per cent with an upward bias. This is based on SBI’s Nowcasting model.

Soumya Kanti Ghosh, group chief economic advisor, State Bank of India, said the Nowcasting model uses the dynamic factor model to estimate the common or representative or latent factor of all the 41 high frequency indicators from Q4 (January to March) of FY13 to Q2 (July to September) of FY22.

The report claims that the Q2 Gross Value Added (GVA) is estimated at 7.1 per cent while FY22 GDP growth rate could be in the range of 9.3-9.6 per cent.

In October, Fitch Ratings had cut India’s economic growth forecast to 8.7 per cent for the current fiscal year from 10 per cent in June, but raised the GDP growth projection for FY23 to 10 per cent, claiming that the second wave of Covid-19 ended up delaying the economic recovery.

On the other hand, the International Monetary Fund or IMF had pegged India’s economic growth at 9.5 per cent for 2021, similar to the projection for fiscal 2021-22 made by the Reserve Bank of India (RBI) after its monetary policy committee (MPC) meeting.

According to Soumya Kanti Ghosh, India’s projected 8.1 per cent growth rate in Q2 (FY22) is the highest growth among all economies. The average GDP growth of 28 selected economies has decelerated to 4.5 per cent in Q3 (2021) against 12.1 per cent, according to the SBI research report.

The analysis points out that at an annual rate of 9.3-9.6 per cent, India’s real GDP growth could now be 1.5-1.7 per cent higher than the pre-pandemic level of FY20.

The report also recounts the experience of big economies like the US and China. It says the US GDP growth nosedived to 4.9 per cent (y-o-y) in Q3 2021 from 12.2 per cent in Q2.

“Resurgence in infections together with supply shortages weighed heavily on consumption and production activity, while fall in Government assistance pay-out, residential fixed investment and exports added further to the downside. For China, growth momentum lost its pace in Q3, with the economy expanding at 4.9 per cent (y-o-y) vis-a-vis 7.9 per cent in Q2 as factory activity took a major hit amidst multiple headwinds. The average GDP growth of 28 selected economies decelerated to 4.5 per cent in Q3 as against 12.1 per cent,” the report said.

REPEAL OF FARM LAWS & MSP

The report also cited Prime Minister Narendra Modi’s recent announcement to repeal the three farm laws and suggested five key agricultural reforms that could act as enablers even without them.

It begins by stating that MSP as a price guarantee is a tricky issue. Experts have been pointing out that a law for determining the legal floor price is poor economic logic as the government sets MSPs for 23 crops, but buys only wheat and paddy in large quantities. Therefore, MSP is not as effective in the case of 21 other crops.

Since MSPs are an assurance that the government will intervene if market rates fall below that threshold, a legislated MSP law making purchase of the other 21 crops below the floor price by traders will end up fuelling high inflation.

The assessment of MSP data for the last two decades indicates that every one percentage point rise in MSP leads to a 15-basis point jump in inflation. They said that a MSP mechanism insulated against demand and global and domestic prices can create market distortions, reduce the profitability for traders and make Indian agri-exports non-competitive as the government’s assured prices are higher than both domestic and international market prices.

The SBI research analysis goes on to say that, hypothetically, buying cereals at MSP will mean making procurement a public good. According to the report, that will drive down the prices significantly below MSP. It claims India is an “oligopsony market” (a state of the market in which only a small number of buyers exists for a product) where there are a large number of small and marginal farmers/sellers, while the buyers are either the government and/or small number of private buyers.

The report says private buyers will always have an incentive to strike a deal separately as the market has many small farmers/sellers willing to sell their produce but unable to do so because of a lack of a market outside APMC.

So, the report proposed that the government could insert a quantity guarantee clause for a minimum period of 5 years that procurement to production percentage of crops (being currently procured) should at least be equal to last year percentage (with safeguards in exceptional events like droughts, floods etc).

The report cites historical trends in the case of procurement, where the average procurement of wheat jumped from 26 per cent in FY14 to 36 per cent in FY21 and that of paddy from 30 per cent to 48 per cent during the same period.

Second, the report proposes that the government can explore converting the MSP to floor price of auction on the National Agriculture Market (eNAM).

It also suggested greater efforts to strengthen APMC market infrastructure. The report claims reduction in harvest and post-harvest losses can help raise farm income. It uses government data to estimate that the monetary loss for cereals every year due to harvest and post-harvest losses is almost Rs 27,000 crore and for oilseeds and pulses, it is Rs 10,000 crore and Rs 5,000 crore, respectively.

While the protesting farmers rejected the government’s move for contract farming in the laws, the report proposes establishment of a contract farming institution, with exclusive right to oversee price discovery in contract farming.

It says that contract farming has been instrumental in many countries as it provides growers access to supply chains with market and price stability, as well as technical assistance. It cites the example of Thailand where market certainty (52 per cent) and price stability (46 per cent) were prime factors due to which farmers participated in contract farming.

Lastly, it suggests ensuring symmetric procurement across states as procurement of cereals has continued to be asymmetric, with top paddy producing states like West Bengal (First) and Uttar Pradesh (Second) witnessing very low procurement, while states like Punjab and Haryana that are not the largest producers, witnessing much larger procurement. In Punjab and Haryana, the procurement of cereals was 83 per cent of the produce.