Without wide vaccine-coverage, consumer-spend will be muted; sans support, MSMEs, lower income households face more pain
It is encouraging the economy showed some spunk in the March quarter with the GVA growth coming in well ahead of estimates, at 3.7% year-on-year (y-o-y) compared with just 1% y-o-y in the December, 2020 quarter. Both manufacturing and construction fared well as did agriculture; not surprisingly, services remained a laggard. Also, there was some investment activity to boot, with growth coming in at 10.9% y-o-y, albeit on a very small base of 2.5% y-o-y in the corresponding quarter.
That is not too surprising since promoters would have wanted to move ahead with projects at a time when the environment was a little less difficult and infections were tapering off. Interestingly and importantly, as Pranjul Bhandari, chief economist at HSBC India has pointed out, the private sector led growth—as seen in the proxy of GVA excluding agriculture and public services—came in at 4.1% y-o-y during the March quarter, way higher than the 0.7% seen in Q2FY21.
This would suggest investments can pick-up further once the second wave of the pandemic ebbs.
Fortunately, the damage from the second wave will not be as severe as from the first one since the restrictions were localised; while growth could contract seasonally—over the March quarter—it would be a smaller contraction than that seen in Q1FY21. High frequency indicators for April and May are weak, but they are not terrible.
While the production of cement and steel have been weak in April, the manufacturing PMI for May is above 50. However, consumer confidence remains low, and given the key services sector is doing badly, consumers will now remain cautious for the next few months. Provided there is no third wave, spending can be expected to pick up pace as the festive season sets in towards end-September. Private final consumption expenditure (PFCE) may have rebounded to 2.7% y-o-y in Q4FY21, having contracted in the three previous quarters, but that comes off an anaemic base of 2% y-o-y in Q4 FY 20. The continued rise in the growth of deposits with banks suggests consumers remain anxious about their jobs and incomes and, therefore, may not spend as freely until the vaccination drive covers a significant section of the population.
Moreover, this time around, rural India has been impacted more severely than it was during the first wave, though it must be said that rural wages have remained relatively firm; Nomura economists point out the rural wage buildup in agriculture increased by 7.2 ppts in FY21 post a rise of 3.8 ppts in FY20, while rural non-agri wages rose 5.4 ppts compared with 3.9 ppts in FY20.
To be sure, there are large swathes of consumers—in the corporate, government, financial services and IT sectors—that continue to earn well. Nonetheless, the economy has so far been driven primarily by government consumption, which grew 28% y-o-y in the March quarter. Given the fiscal constraints this year in the light of tax collections and non-tax receipts falling short of targets, one is not sure how much more the government could spend, beyond the allocations specified in the budget.
The reason we need a strong dose of fiscal stimulus—targetted at the vulnerable sections via cash transfers or employment schemes—is the wide disparity in the recovery seen in the formal and informal sectors. The GVA for the overall economy contracted 6.2% in FY21, while that for the corporate sector expanded 18%. Without support, the informal sector will suffer further, hurting lower-income households.
Economists have pointed out the government’s deficit has widened, partly due to an accounting change. Moreover, in a difficult environment, any deviation from formal targets would be forgiven. Without a push, the economy is unlikely to clock double-digit growth; at the very best, GVA could grow at 7-8%, on the back of a contraction of 6.2% in FY21.