A V-shaped economic recovery is certain, but for how long?

By: |
Published: June 2, 2020 5:30 AM

With the economy in bad shape even before Covid-19, and no large stimulus, even FY22 will be a low-growth year.

The government’s relief package is expected to start taking effect sometime in mid-June, but this would merely help companies restart operations.The government’s relief package is expected to start taking effect sometime in mid-June, but this would merely help companies restart operations.

Given the severity of the economic collapse, even though FY22 will see a V-shaped recovery—even a 0% growth is a V after the likely minus 5% for FY21—it is unlikely the growth will be very strong or, for that matter, even a sustained one, because the damage to the economy will be quite large owing to the severe credit squeeze. As the numerous revisions to GDP data make it clear, the problem has been in the making for some time now; real GVA for the private sector is estimated to have grown at just 3.3% in the nine months to December, a precipitous fall of 300 basis points year-on-year (y-o-y) and a 40-year low. So, if the economy was in such bad shape even before Covid-19 hit us, it would be optimistic to expect a recovery in the near term, especially since there is no big stimulus yet.

The government’s relief package is expected to start taking effect sometime in mid-June, but this would merely help companies restart operations. In the absence of adequate purchasing power and only a small stimulus element, at around 0.8% of GDP, it could be another 6-8 months before meaningful revenues start kicking in. And, that is if the unlocking process works smoothly and Covid-19 spread stays under control. The pandemic, unfortunately, will cause consumer spends to shrink for well-known reasons; job losses, pay-cuts and the fear of layoffs, whether in the formal or informal sector.

CMIE data shows the unemployment rate, in the week to May 24 was 24.3%, a shade higher than the 24% rate recorded in the preceding week. To be sure, many will go back to work over the next few months, but the visibility on how soon normalcy will be restored is very poor. One must also keep in mind the fact that consumption was muted well before Covid-19; private consumption demand slowed to 2.7% y-o-y in Q4FY20—a downtrend that has been seen since Q2FY19. This is reflected in the fall in operating profits of 12% y-o-y in the March quarter, for a sample of listed 265 companies, on the back of a 2% y-o-y drop in revenues.

It is becoming something of a vicious cycle now; until consumption trends improve there can be no incentive for further capacity addition, but without meaningful investments, we cannot hope for job opportunities to be created on a big scale, and, therefore, no big jump in consumption. In fact, capex contracted 6.5% y-o-y in Q4FY20, the third straight quarter of contraction.

With growth way below potential, there can be no reason for the government to not up the stakes. The lower-than-budgeted tax collections will drive up the Centre’s fiscal deficit for FY21 to an estimated 7%—versus the 4.6% for FY20—and the consolidated deficit to around 10.5% of GDP. But, there is an urgent need for the government to spend, and economists believe that some part of this could be funded by RBI’s open market operations.

Moreover, banks need to be capitalised so that they are confident of being able to tackle rising NPAs and start lending without fear of their capital base being eroded. At the end of the day, business enterprises need cash to be able to reboot operations. The fact that private sector activity in Q4FY20 grew by just 1%y-o-y despite only 10 days of shutdown reveals the extent of sluggishness in the economy. If the government acts too late, the damage to the economy could be severe.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Isolation Error: Govt should have considered a few hard realities before tweaking Covid isolation rules
2India Inc must reform, raise capital
3Custodial death: Jeyaraj and Bennix shouldn’t have been remanded to any custody, writes P Chidambaram