Economic revival mostly due to pent up demand, base effect; unlikely to sustain after festivals

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November 25, 2020 12:34 PM

The spikes in the production seen in various sectors in the month of October are an exaggeration of the true recovery on the ground.

economic revival, recovery, festive season, post-pandemic, GDPProminent base effects have supported the growth in certain economic sectors.

India’s economy saw a significant improvement in various macroeconomic indicators in the month of October 2020; however, it is unlikely to sustain after the festive season. The spikes in the production seen in various sectors in the month of October are an exaggeration of the true recovery on the ground, as those have been driven by a large component of pent-up demand that may not sustain after the festive period is over, rating agency ICRA said in a report. Prominent base effects have also supported the trends in certain sectors, the report added.

Out of 17 high-frequency indicators, the on-year performance of 10 sectors, including the output of automobiles, generation of GST e-way bills, thermal electricity, ports cargo traffic, domestic airlines’ passenger traffic, fuel consumption, etc, recorded a pickup in October. On the other hand, the on-year performance of six indicators, including the output of Coal India Ltd (CIL), vehicle registrations, and non-oil merchandise exports, etc, fell during the month.

In addition, the on-year growth in non-food bank credit remained unchanged during the fortnight ended October 23, 2020, at the level recorded as on September 25, 2020. The trend indicates the unevenness in the recovery that is playing out in the different sectors of the economy.

Though the rating agency expects a stronger rebound in economic activity in the second half of the current fiscal year, compared to an earlier assessment of a contraction of 3.5 per cent, it has cautioned that the spikes in the production seen in various sectors in October 2020 may not sustain after the festive period is over. Further, the pace of Government spending in H2 FY2021, after the unexpected contraction recorded in Q2 FY2021, remains to be seen.

Meanwhile, the possibility of re-imposition of restrictions in one or more states, on account of a fresh surge in Covid-19 infections may temper the momentum of the recovery, ICRA said. While many rating agencies have released a revised projection of the GDP growth, ICRA said that it will revisit its estimates of an 11 per cent contraction in Indian GDP in FY2021 in early-December 2020, after the data for Q2 FY2021 is released by the government.

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