Uncertainties around employment and financial anxieties have reduced the spending intent amongst Indian consumers on discretionary goods.
With the movement restrictions easing gradually, India is striving to bounce back to normalcy. However, some uncertainties continue to exist. The economic rebound to the pre-COVID-19 levels is likely to be gradual as the rising number of infections, the intermittent regional lockdowns, social distancing norms, and safety concerns result in a vicious cycle of low demand and supply. According to a consumer survey by Deloitte, uncertainties around employment and financial anxieties have reduced the spending intent amongst Indian consumers on discretionary goods. Lower demand is expected to translate into constrained business investment in capital projects and delay in hiring.
Policymakers and businesses will require resilience to prepare in the months ahead to recover from this crisis. Five factors will be key in determining the pace and time of the recovery. The availability of treatment and vaccines will be the most important factor, and the sooner people have access to either of these, the quicker will be the economic revival. This is because the spread of the virus and its longevity are slowly leading to another contagion—of caution and fear (the second factor). Caution amongst consumers may change their consumption behaviours and demand patterns, while businesses may modify business practices leading to rapid automation or business models, such as reshoring.
The third factor will be the intensity of the secondary impact of supply-chain disruptions spilling across industries and the financial sector. Initially, a few industries, such as hospitality and manufacturing, felt the immediate impact of the virus and the movement restrictions that followed. Possibilities of several outbreaks and prolonged pandemic may impact productivity, and capacity building across all industries, all of which may also lead to slower credit growth.
The strength of domestic consumer demand, the primary pillar to growth, will be the fourth factor. While rural demand may hold up for some time because of better rainfall and the government’s support to provide employment opportunities in rural areas, the rapid spread of the infections in urban areas may keep the demand subdued. That said, the infection curve in larger urban areas (such as NCR and Mumbai) appears to be flattening and economic activity is expected to gather steam as these regions gradually open up. Simultaneously, global economic growth and trade will influence domestic demand as well. A coordinated effort to curb the infection spread will translate into a synchronised recovery across the world. However, there is less evidence suggesting harmonised efforts to curb the spread as different countries are at different stages of the infection.
Finally, the extent and effectiveness of the fiscal and monetary stimulus by the government will determine the human cost and economic disruption, as India strides towards a new normal on the other side of the pandemic. So far, the government has announced a wide range of health, tax, financial, business, and social measures and reforms to help people and businesses respond to COVID-19. Fresh measures aimed at improving infrastructure, regulations, and job opportunities will likely aid in a sustained recovery and rebuilding. In other words, government measures will be crucial in cushioning the pandemic impact on industries and economic activity.
The variations around these five factors will likely determine India’s economic growth for the next few years. This could range from a moderate economic impact with gradual recovery (most likely case) to severe economic damage with sluggish recovery (extreme worst case with low likelihood). We are optimistic about the outlook and assuming that the contagion is under control by the end of this year, consumer spending will quickly pick up pace due to strong pent-up demand. Private investment growth, which has been in the negative territory for over three quarters now, will recover after it picks up cues from a sustainable increase in demand. Under the most likely scenario, recovery is likely to gain momentum from the start of FY2022 after negative growth in FY2021.
A quick economic recovery will likely have a moderate impact across all industries and may lead to a relatively uniform revival, with a few bouncing back sooner than others. Once the recovery begins under the most likely scenario, prices may escalate faster. Pent-up demand backed by high government spending may cause demand to overshoot supply.
If the pandemic prolongs, essential goods segment of retail, the pharmaceutical industry, and the technology and communication industry will likely weather the storm in due course of time. However, the hospitality and banking industry may continue to see difficult times ahead. Industries must prepare themselves for uncertain times while hoping for the best.
Rumki Majumdar is an Economist at Deloitte India. Views expressed are the author’s personal.