Economic Whirlwinds
Business Today|May 16, 2021
With India firmly in the grip of the second Covid wave, the much-expected catapult from a buoyant Q1 is unlikely. How should the Centre steer a slowing economy?
JOE C. MATHEW AND ASHUTOSH KUMAR

At 8:05 PM on April 20, the Twitter handle of the Prime Minister’s Office (PMO) announced that PM Narendra Modi will address the nation on the Covid-19 situation in the next 40 minutes. The PMO tweet put the entire country on listening mode since Modi has made disruptive announcements at short notice — demonetisation was declared overnight and national lockdown against Covid-19 last year happened within four hours of the announcement. Thankfully, a hard lockdown was not even an option this time round. The one emphatic message the Prime Minister conveyed was, “Lockdowns should be used as a last resort. States should focus on micro-containment zones. We have to save the country from lockdown”. There was a reason why he urged state governments to instil confidence among migrants that their income and livelihood were safe. The lockdown between end March and June 2020 had the most debilitating impact on the economy. In Q1FY21, the Indian economy shrank 24.4 per cent, the maximum among major economies. For FY21, India’s GDP is projected to contract 8 per cent according to government estimates.

If that was the main reason to avoid a lockdown, the current state of the economy may have been another. India’s economy, which was slowly inching towards normalcy and growth between July-December 2020, appears to have hit a major roadblock during January-March 2021. The Index of Industrial Production (IIP), an indicator of manufacturing activity across sectors, has lost steam and the output of eight core sectors registered the steepest fall of 4.6 per cent in February. The Purchasing Managers' Index (PMI), a barometer of supply chain movements in the manufacturing sector, fell to a seven-month low, foreign investments have slowed, car sales declined and inflation has risen. These and most other indicators point to an economic recovery that is stalling, if not already stalled.

With the second wave of Covid-19 — much fiercer and more devastating than the first — engulfing the country, a fragile last-quarter performance would mean performance during the first quarter of FY22, with all its pandemic linked disruptions, is going to be way below expectations. This was indeed a quarter that was supposed to herald a quick recovery for FY22, particularly due to the low base effect of April-June FY21, when the Indian economy shrank 24.4 per cent. Economists were banking on at least a 26.5 per cent growth in the quarter for India to turn around GDP growth to 10.5 per cent in FY22. With Q1 likely to get nowhere near that, prospects for the fiscal look grim.

Even before this fiscal began, the last quarter of FY21 failed on many economic fronts. It did not reflect the burst of growth witnessed during July-December FY21 after the easing of lockdown in June 2020. Was that growth a mere manifestation of pent-up demand due to a quarter-long lockdown last year? Has the Indian economy stalled already?

Not really, says the finance ministry. Economic revival will continue despite the second wave of infections. “(Economic) revival was happening, is happening and will continue to happen. Sentiments do not fall so rapidly. You will withstand this challenge also. Year 2019 was about liquidity (crisis), 2020 was about Covid (crisis), but 2021 shall not be about Covid, in spite of the second wave. I want to assure you,” Finance Minister Nirmala Sitharaman said while addressing members of the Merchants Chamber of Commerce & Industry in Kolkata recently.

Rajiv Kumar, vice chairman of NITI Aayog is more cautious. “Apart from direct impact on some sectors like services, the second wave will increase uncertainty in the economic environment which can have wider indirect effects on economic activities. So, we need to prepare for greater uncertainty, both in consumer and investor sentiments,” he says, while maintaining the country will see an economic growth of 11 per cent in the current financial year.

Most brokerages though are not that optimistic. They have downgraded estimates after factoring in the surge in Covid cases and the resultant restrictions. Nomura has cut economic growth projections for FY22 to 12.6 per cent from 13.5 per cent projected earlier. JP Morgan has revised it downwards to 11 per cent from 13 per cent earlier. UBS has curtailed it to 10 per cent from 11.5 per cent. One thing is certain. India’s economic revival is not going be as smooth as Sitharaman and Kumar like. Ominous signs were there in the last quarter of 2020/21 itself. The raging health emergency has only made India’s path to economic revival tougher.

Ominous Signals

The government’s claims notwithstanding, one of the key macro-economic indicators — IIP — has meandered in the negative territory for at least nine out of 12 months since the Indian economy confronted the Covid-led challenges beginning March last year. Since then, IIP has remained in the positive zone only in September, October and December last year, largely on account of pentup demand post lockdown and festive demand. The IIP contraction has only grown wider in February at (-)3.6 per cent, against (-)1.6 per cent in January.

In February, when the contagion had largely subsided and there were no restrictions, manufacturing and mining contracted by 3.7 per cent and 5.5 per cent, respectively, a further deterioration compared sequentially with January 2021, when manufacturing shrank by 2 per cent and mining by 3.7 per cent. There were no Covid-led disruptions in the form of restrictions or localised lockdowns then.

Core sector output, too, shrank 4.6 per cent in February, registering the steepest fall in the last six months. It declined 6.9 per cent last August. The pre–Covid level for the core sector was a growth of 6.4 per cent in February 2020.

The rapid spread of the contagion in March and April has the potential to jeopardise the fragile recovery further. Experts believe India’s Covid curve, which started rising towards end-February and beginning of March this year, will have a bearing on growth in coming months. The PMI gives a sneak peek into what’s in store for the future, especially in the aftermath of the raging Covid-19 numbers and subsequent disruptions. IHS Markit data released earlier this month revealed manufacturing PMI for March fell to 55.4 from 57.5 in February.

Economists are of the opinion that the surge will impact IIP and near-term momentum of the economic revival. “The Covid surge and localised lockdowns will definitely hamper industrial activity. Additionally, contact-based services will also be impacted. With this the revival that we were expecting to come about in the next two to three months will get postponed. The near-term sequential momentum that we expected in the first quarter is going to take a hit for sure,” says Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank.

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