‘Green shoots’ of economic recovery visible? Why it is premature to talk about it

Of course, economic activity is up, but it can fall as more cities lock down; and don’t ignore structural problems.

Right now, though the pace of recovery isn’t exciting enough to warrant any cheer.
Right now, though the pace of recovery isn’t exciting enough to warrant any cheer.

The economy is getting back on track, but haltingly. The government seems to be enthused by ‘green shoots’ springing from a rise in production—for some sectors, to near pre-pandemic levels. But, it is much too early to cheer; we must acknowledge that, after an initial recovery, the activity curve is flattening. Unfortunately, the corona-curve is not.

Since the lockdown has been lifted in most parts the country, it is no surprise that FMCG firms are running at 80-90% capacity. That basic goods would sell if available was to be expected. That hordes of migrants have been boarding trains to get back to where they were before they went home, too, is not a surprise; 60-70% of those who have trudged home were expected to go back to their jobs because there is no way they can earn a livelihood in rural India. Unemployment rates, as measured by CMIE, have come off sharply, and are near pre-pandemic levels of 8% after rising to levels of 27.1% in early-May. This is thanks to a sharp improvement in rural India, possibly because of the larger allocations to employment schemes.

Dealers have started stocking cars in fairly good numbers and retail sales should pick up as shops and showrooms open up; in rural India, tractor sales are doing well and spending will surely pick up momentum as the festive season approaches. India is, after all, a Rs 200 lakh crore economy, and even if there is a contraction of 5-6%, as most economists expect there will be, it nonetheless means an output creation of Rs 190 lakh crore.

Right now, though the pace of recovery isn’t exciting enough to warrant any cheer. Several indicators, such as sales of trucks or freight rates, are dull. The Nomura India Business Resumption Index, which tracks the pace at which economic activity is normalising, moderated to 69.2 for the week to July 5 from 70.5 on June 28; at the end of April, it was at 45. Economists at Nomura noted the slowdown was primarily driven by a continued flattening of Google’s mobility indices along with a downtick in labour participation and power demand. They pointed out that while business resumption continued in June, activity remains about ~30pp below pre-pandemic levels. In other words, the normalisation is still far from complete, and activity appears to be plateauing at a lower level.

To be sure, this could be the outcome of the lockdowns being re-imposed in some states—Maharashtra, Karnataka, West Bengal, Tamil Nadu and Telangana have clamped down after easing the rules—and the momentum could pick up again. There is also no denying that once the country has been fully opened-up both production and consumption will see a spurt.

But, we seem to have forgotten that growth was decelerating rapidly before the epidemic; GDP in FY20 grew at an unflattering 4.2%. Post the pandemic, the wealth destruction that takes place as thousands of businesses shut down, thanks to the decelerating consumption demand, will result in job losses and also further rein in demand. Sectors such as real estate and construction—which create jobs and also demand for goods such as steel and cement—will take two to three years to recover given the poor sales potential and cash flow stress. The services economy, in particular, could see a sharp slowdown since sectors such as aviation, hospitality and restaurants could take a long time to recover. Unless, of course, we have a vaccine that can fight the virus in the next 6-7 months. That will eliminate the fear factor, lift consumer confidence and spur spending. But, this late push is unlikely to be able to prevent a contraction in FY21.

The big worry though is investments, being critical for long-term sustainable growth and job creation. And, because of the Covid-19 epidemic, these will now be delayed by at least 3-4 years. Even before the pandemic, investment levels had collapsed to multi-year lows; while the inorganic transactions are fresh investments, they don’t result in new capacity or new jobs.

Ironically, short–term real interest rates are in negative territory, but there is little appetite for credit as also little inclination to lend.

If banks continue to play it safe, as they are now doing—and they are justified in their decision—the economy will not bounce back as needed in FY22. To hit a growth rate of 5-6% in FY22, we need a chunky infusion of funds into the economy by the Centre that can kick-start growth. The state governments are struggling with their finances and are borrowing large amounts from the markets to compensate for the shortfall in GST collections as also losses on account of sales tax, VAT on auto fuels and excise on alcohol, and also on property registrations. Since banks are unlikely to change their minds and step up lending, the government needs to spend. In the absence of a stimulus, the uptick arising out of pent-up demand could peter out post the festive season. Corporate results for FY20 were poor with profits crashing 37%, leaving companies with small surpluses and little room to raise salaries let alone add manpower. The economy needs succour and needs it fast.

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