With the lockdown gradually easing, mobility data has begun to tick higher. But, a sudden rise in the Covid-19 proliferation rate, and working capital requirements, may add more road bumps ahead
By Pranjul Bhandari & Aayushi Chaudhary
Towards the end of the second phase of the national lockdown (which ended on May 3), the authorities announced some planned restarting of activity. The idea around this third phase of lockdown, starting May 4, is to divide the economy into zones, with limited activity in the red zone (mostly cities), and enhanced activity in the orange and green zones. We estimate that 40% of the economy will continue to remain disrupted (versus 65% and 50% in the first two phases of the lockdown, respectively). In that sense, the country is gradually going back to work … but it may not be a smooth road.
The April services PMI came in at a shocking low of 5.4, while the manufacturing PMI also contracted at a record pace. This doesn’t come as a surprise considering that the economy was in extreme lockdown mode until the middle of the month. But, April may well be the trough. Things have picked up since. Combining Google and Apple mobility data, we find that (1) from mid-April some essential activities have picked up pace (e.g. walking down to the grocers), (2) towards the end of the month, some regular activity started rising gradually (e.g. car rides to the workplace), and (3) in early May, there was a big spike in driving activity (although retail and recreational outings are still at a stand-still).
But, there may be two road bumps ahead along the normalisation route. One, the doubling rate of Covid-19 picked up pace in early-May (exactly a fortnight after the extreme lockdown was first relaxed). This could impact confidence around further opening up, especially in the red zones. Two, the economy may need a fresh injection of working capital in order to restart. We do expect a round of fiscal stimulus to help small businesses, taking the general government fiscal deficit to 10% of GDP in FY21. The latest oil excise tax increases (by Rs 10-13/litre) will help the fiscal math, but will only offset ~30% of the (tax and disinvestment) revenue losses, by our calculation.
We believe the 10% deficit number could be managed if the stimulus is targeted and temporary, and the authorities diversify across all sources of funding. Worries about a potential ratings downgrade are widespread. The last time India saw a downgrade was back in 2012, but the action was limited to an outlook change, keeping the economy in investment grade. On the other hand, we think worries about an inflation spike are overdone. As the April PMI suggested, this is both a supply and demand shock, with the latter being stronger than the former, keeping inflation well behaved (despite the April CPI being sticky).
Bhandari is chief economist, India, & Chaudhary is economist, HSBC Global Research. Views are personal
Co-authored with Priya Mehrishi, Economics Associate,
HSBC Global Research
Edited excerpts from HSBC Global Research’s India’s bumpy road back to work (dated May 6, 2020)