Economic travails: Nascent recovery disrupted; consumption needs big push

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May 31, 2021 4:00 AM

After a rollercoaster ride up to February last fiscal in the wake of the pandemic, merchandise exports surged a record 196% year-on-year in April, thanks to a conducive base.

In its last policy meeting in early April, the Reserve Bank of India (RBI) said GDP growth could jump to 26.2% in the first quarter of FY22, driven primarily by a conducive base. However, this forecast for Q1FY22 was issued before the full fury of the second wave of the pandemic and may undergo substantial revision.

Two months into the fiscal FY22 and three months since the release of the second advance estimate of GDP for FY21, it is now apparent with the second Covid wave that the economy’s nascent, pigeonholed recovery from the trough seen in the first quarter of last fiscal has been disrupted again. The timing and extent of the pullback are still being unfolded — today’s data for Q4FY21 will provide more hints on it.

With labour wage growth lagging return on capital, consumption recovery is impeded. The policymakers seem to have erred in anticipating a broad-based investment-led recovery.

Weighed down by a heavy debt burden caused by several quarters of augmented spending unmatched by non-debt receipts, the general government has limited medium-term options. Other engines of the economy need to start firing sooner rather than later, but that has been wishful thinking for quite some time.

A front-loading of budgetary expenditure and CPSE capex appears to be the government’s short-term plan to salvage the situation.

The March quarter may come on a par with or slightly better than the National Statistical Office’s (NSO) last estimate – it had predicted gross value added (GVA) expansion of 2.5% in Q4FY21, though the GDP was seen contracting by 1.1% due to back-ended release of subsidies. Icra and SBI Ecowrap recently predicted a slightly better Q4. The GVA and GDP had grown at 1% and 0.4%, respectively, in Q3FY21, regaining some lost steam after two straight quarters of deep contraction.

However, the current quarter, shattered by the savage second wave of the pandemic, would have the benefit of just a very favourable base, not much else. And uncertainty looms large in the path ahead, with Covid spread not being contained expeditiously and the vaccination pace being disconcerting. Economy’s long-term growth potential is significantly impaired.

As the charts show, the downward slide of the economy turned sharper since FY19. The last two years were precipitous, with the pandemic accentuating the fall. As almost all pillars of the economy, with the exception of agriculture, have borne the brunt, a fiscally stressed government has stood guard with limited success.

To be candid, key sectors like construction, trade, transport, manufacturing and mining will likely remain the worst affected ones in FY22 too, as in FY21. The Centre’s tax buoyancy will likely be much lower than 1.2 assumed in the Budget, and its non-tax revenue and non-debt capital receipts (privatisation and asset monetisation) could also need sharp downward revisions. DK Srivastava, chief policy adviser at EY, sees a total shortfall of `2.3 lakh crore in the Centre’s total non-debt receipts from the budgeted level. Even this could turn out to be optimistic.

Moreover, despite the guaranteed growth in goods and services tax (GST) revenue, states governments may face acute revenue constraints; they will likely rein in capex in the current fiscal year as well, as they did in the last couple of years.

In its last policy meeting in early April, the Reserve Bank of India (RBI) said GDP growth could jump to 26.2% in the first quarter of FY22, driven primarily by a conducive base. However, this forecast for Q1FY22 was issued before the full fury of the second wave of the pandemic and may undergo substantial revision.

The key to regaining the growth momentum is to spur consumption growth. The government would do well to augment income transfers to the low-income population and take steps to increase the disposable income of the middle class. Available data, however, signal that consumption growth would pick up only modestly in the near term, as wary households choose to bolster savings buffers that have been drained over the past year. The worst affected, of course, are those employed in the informal manufacturing and services sectors besides the self-employed.

The second Covid wave struck the economy when industrial output jumped 22.4% in March, reversing two months of contraction, but driven primarily by a favourable base (it had shrunk 18.7% in March 2020 due to a lockdown). Electricity demand also saw a sharp recovery in March-April partly because lockdown led to increased household consumption. But manufacturing PMI hit a seven-month low in March, while services PMI, too, lost momentum.

Non-food credit growth remained subdued, having fallen to 4.9% in March from 6.7% a year before. Though RBI was sanguine in its latest annual report about credit demand and supply and noted that “banks would have sufficient capital at the aggregate level even in a severe stress scenario”, a prolongation of the Covid wave could be a spoiler.

After a rollercoaster ride up to February last fiscal in the wake of the pandemic, merchandise exports surged a record 196% year-on-year in April, thanks to a conducive base. Exports in April stood at $30.6 billion, up almost 18% from the same month in 2019 (before the pandemic struck), mainly on the back of improved order flow.

Industrial output and exports are expected to be aided by favourable base effect in June quarter as well. But as the RBI pointed out, “even though India’s merchandise exports and imports show nascent signs of recovery, the worsening global trade environment due to resurgence in Covid-19 infections may impinge upon external demand”. Production-linked incentive (PLI) schemes, aimed at incentivising domestic value addition and large capacity creations, may take time to yield results.

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