Road to recovery remains fraught

By: |
September 02, 2021 5:00 AM

Vaccination progress and festive season may help, but govt spending remains crucial as ever to create the jobs needed

Also, government consumption turned out to be very subdued, contracting nearly 25% q-o-q seasonally adjusted, which economists attribute to the states not spending as expected.Also, government consumption turned out to be very subdued, contracting nearly 25% q-o-q seasonally adjusted, which economists attribute to the states not spending as expected.

The PMI reading of 52.3 for August, below the July print of 55. 3 and also lower than those for March and April, is a sobering reminder the economic recovery remains somewhat uneven. Even more sobering is the fact that unemployment in August rose to 8.32% from a four-month low of 6.95% in July, according to CMIE. In fact, the GDP numbers for the June quarter were a shade softer than consensus expectations, with the performance of both industry and services remaining well below the pre-pandemic levels of June 2019. Given the country’s biggest need today is jobs, trends seen Q1FY22 don’t suggest large employment opportunities will be created over the next six to eight months. For one, capital formation was down 17% over June 2019 levels.

Even viewed sequentially, fixed investments contracted a little over 15 % quarter-on-quarter (q-o-q) seasonally adjusted. Since the government’s contribution was reasonably good, clearly, the private sector remains reluctant to make large investments; it will probably remain so until visibility on demand improves and the capacity utilisation moves up closer to levels of 75%, from sub-70% levels as of now. New project announcements by the private sector for the June quarter according to CMIE data, were of the order of Rs 1.2 lakh crore—about a fourth of the peak of Rs 4.4. lakh crore reached in the December 2019 quarter.

The key services sector, the biggest part of the economy, grew at a very modest 11.4% y-o-y in the June quarter; this is a worry because the sector creates job opportunities. A key segment comprising trade, hotel, restaurants, etc, contracted a sharp 35% sequentially. Some loss in the sequential momentum was, no doubt, expected given the restricted lockdowns across the country for the three months to June, during the severe second wave of the pandemic. That the direct economic cost of the second wave in the June quarter—the contraction of 6.3% q-o-q seasonally adjusted—was a third of that seen during the first wave, is comforting.

Private consumption, not surprisingly, was down 12% over June 2019 levels; even seen sequentially, it contracted by about 9% seasonally adjusted. At Rs 17.8 lakh crore, private consumption is the smallest in 15 quarters save for the June 2020 quarter when the country was under a total lockdown. To be sure, it is not all about demand being weak, but that restricted entry to malls, hotels, restaurants and shopping outlets has left consumers with limited opportunities to spend. Again, supply bottlenecks have hit sales of products—cars, for instance, where the shortage of chips has resulted in long waiting periods. As the festive season approaches and vaccination progresses, one expects the recovery to gather momentum. Also, government consumption turned out to be very subdued, contracting nearly 25% q-o-q seasonally adjusted, which economists attribute to the states not spending as expected.

While exports turned in a superb show in Q1FY22, economists caution the global demand for goods could slow and that their contribution could, over a period, become smaller. To ensure the recovery sustains, the Centre must spend; despite robust revenues, the fiscal deficit for the April-July period was 21% of the budget estimates. This is critical for the informal sector where the recovery has been much weaker; real GVA for the economy grew at 18.8% in Q1FY22 while that for the corporate sector increased 48%. A big chunk of the 40% of the labour force, who are non-agricultural workers, in the informal sector could be stranded without work. The government must move quickly on implementing schemes like the PLI one. Job-creation must be top priority.

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