India’s growth in the first quarter of current financial year is likely to be “the worst” amongst the four quarters of FY-21 because of economic disruptions caused by the Covid-19 pandemic, an EY India’s report said indicating improved economic performance from the second quarter.

“High frequency indicators for India are giving positive signals after the first two months of the pandemic,” the consultancy firm said in its latest edition of Economy Watch before the scheduled release of official gross domestic product (GDP) data on Monday.

The optimism of the report is based on indicators such as the Purchasing Managers’ Index (PMI), the Index of Industrial Production (IIP), sales of passenger vehicles, power consumption and the rise in the foreign exchange reserve.

“In June and July 2020, PMI manufacturing was close to the benchmark level of 50 at 47.2 and 46.0 respectively. Although IIP has continued to contract in June 2020, its rate of contraction has come down to -16.6% from its May 2020 level of -33.9%. In June 2020, passenger vehicle sales picked up sharply with sales of 1,20,188 units as compared to sales of 33,546 units in April and May 2020 considered together,” it said.

Although power consumption shows a continued contraction, the rate of contraction has been coming down over successive months since April 2020 when it was at -25%. This fell to -0.4% in the first 20 days of August 2020, it added. It also pointed at the foreign exchange reserves continued to rise steadily reaching a level of $538 billion by August 7, 2020 as a positive indicator.

DK Srivastava, chief policy advisor of EY India, however, said one adverse development is the slowing down of bank credit growth to 5.8% in the fortnight ending 17 July 2020. “Due to subdued demand, average credit growth fell to 6.4% in the first quarter of FY21 as compared to 7.1% in fourth quarter of FY20,” he said.

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He said the center’s capital expenditure grew by 40.1% in the first quarter of FY-21 as compared to a contraction of -27.6% in the corresponding period previous year, indicating frontloading of capital expenditure by the Union government, which is “welcomed as it signals investment in infrastructure” in line with the National Infrastructure Pipeline (NIP) objectives.

In his Independence Day address on August 15, Prime Minister Narendra Modi unveiled over Rs 110 lakh crore infrastructure projects to boost the economy and create jobs. “In order to rapidly modernise India, there is a need to give a new direction to overall infrastructure development,” he said, adding that over 7,000 projects under NIP have been already identified.

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The report, however, pointed at rising fiscal deficit. The Controller General of Accounts (CGA) data released for the month of June 2020 shows that center’s fiscal deficit in 1Q FY21 is already 83.2% of the annual budgeted target. “In terms of magnitude, the fiscal deficit in 1Q FY21 is 53.3% larger than the corresponding magnitude in 1Q FY20. Center’s revenue deficit during 1Q FY21 stood at 94.8% of the annual budgeted target as compared to 77.1% in the corresponding period of FY20,” it said.