Key commodities like steel, cement, zinc, aluminium, etc., have seen a one-way rally since the beginning of the recovery cycle as demand far exceeded supply in the international market.
By Vaibhav Agrawal
The second wave of COVID-19 hit India at a time when the economy was witnessing swift recovery led by high pent-up demand. The same euphoria is missing from the market as demand revival has been quite moderate after the second COVID-19 wave. With the emergence of the Delta Plus variant and the possibility of a third wave, consumers have remained wary of spending on large purchases, and a large part of spending is restricted towards essential items.
Consumer reservations on spending have added uncertainty over India’s growth forecast for 2021. Considering the lower demand offtake, several international organisations like IMF and the World Bank have lowered their growth forecast from double-digit to high single-digit in FY22. Back home, even the RBI has lowered their GDP growth forecast to 9.5% from the earlier projection of 10.5%.
Limited Impact of Restrictions
One major reason for muted pent-up demand could be the resilient supply chain management during the second COVID-19 wave. Learning from the supply shock of the first COVID-19 wave, companies managed their supply chain efficiently, which helped in maintaining the uninterrupted flow of supply even during the lockdown.
It can be ascertained from the data comparison of peak lockdown months during the first and second waves. Monthly container traffic at Jawaharlal Nehru Port Trust declined to 4.68 lakh TEUs in April’21 but remained significantly higher from the same month last year when it had declined to 2.84 lakh TEUs.
Railway freight volumes also remained at a healthy level of 3.7 mn tonnes in April, significantly higher than 2.2 mn tonnes last year. The same was the trend in consumption of petrol and diesel. Petrol consumption was healthy at 2,384 mt tonnes in April after falling to 973 mt tonnes a year ago. Diesel consumption was at 6,679 mt tonnes in April as against 3,250 mt tonnes last year.
The data signifies the lesser impact of restrictions under COVID 2.0 as compared to the first wave. It kept the supply stable and ensured production continuity despite the interruption.
Inflation Emerges as a Major Concern
In the current scenario, with faster vaccination drive and growth returning to the developed markets, the threat of COVID-19 is abating fast. Raising inflation has replaced it as a new threat that could derail growth. The wholesale price index (WPI) during May hit a fresh high of 12.9% on account of elevated commodity prices in the international market. Rising WPI has directly impacted retail inflation with the rising cost of domestic goods and services. It has impacted the purchasing power and lowered consumer confidence, ultimately reducing aggregate demand.
The world is taking note of higher commodity prices. The latest policy announcements from the US Fed have provided enough hints in this matter. The US Fed has postponed its rate hike plans by a year and announced to take two rate hikes in 2023, depending on the situation.
If elevated inflation forces global central banks to withdraw liquidity earlier than intended, it could impact the flow of funds into emerging markets like India and derail the recovery process.
For Now, Commodity Is the King
Key commodities like steel, cement, zinc, aluminium, etc., have seen a one-way rally since the beginning of the recovery cycle as demand far exceeded supply in the international market. This has prompted a rally in the cyclical sectors despite the COVID-19 second wave. Having said that, there is so much unemployment, and sectors like travel, tourism, hospitality, small MSMEs are much affected in the second wave, and the relief package announced by the government will help to lift the sentiments going ahead.
The monthly agriculture production volumes in 2021 are not only higher than those in 2020 but are also higher than the pre-pandemic 2019 levels, indicating a revival in the rural economy. Rural demand, which has been robust since the unlocking of the economy last year, will continue its upward trajectory driven by normal monsoon as forecasted by IMD, strong agricultural production, and recently announced increase in minimum support price (MSP) for all mandated Kharif crops.
Stock Market Sails Through
Though the second wave impacted the economy, the Indian Stock Market hasn’t tanked like last year. It was immensely helped by the net inflows of FIIs and relative ease in restrictions as compared to the first wave. It helped companies to stay operational in a phased manner. We might see some correction because of some near-term speed breakers, but this should be looked at far more as an opportunity to allocate more. The reason is that the Indian Stock Market is on the cusp of a major upcycle, and we should not bet against India.
Vaccination: A Lot Needs to Be Done
With the number of new COVID-19 cases now falling, vaccination of all will be the key trigger for India’s growth recovery. While India has crossed the US, in terms of the number of administered doses, the country still has a long way to go in terms of vaccinating its entire population.
The government has set the target of vaccinating its entire population by the end of December 2021. For that, India will need to administer one crore doses every day and require the government to ramp up its existing infrastructure. As per an estimate, it might require additional spending of Rs 15,000 crore over and above the Rs 35,000 crore allotted in the budget.
(Vaibhav Agrawal is the CIO of Teji Mandi Investment Advisor. Views expressed are the author’s own. Please consult your financial advisor before investing.)