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Economic Whirlwinds

With India firmly in the grip of the second Covid wave, the much-expected catapult from a buoyant Q1 is unlikely. How should the Centre steer a slowing economy?

Economic Whirlwinds

Illustration by Nilanjan Das

At 8:05 PM on April 20, the Twitter handle of the Prime Minister's Office (PMO) announced that PM Narendra Modi will address the nation on the Covid-19 situation in the next 40 minutes. The PMO tweet put the entire country on listening mode since Modi has made disruptive announcements at short notice - demonetisation was declared overnight and national lockdown against Covid-19 last year happened within four hours of the announcement. Thankfully, a hard lockdown was not even an option this time round. The one emphatic message the Prime Minister conveyed was, "Lockdowns should be used as a last resort. States should focus on micro-containment zones. We have to save the country from lockdown". There was a reason why he urged state governments to instil confidence among migrants that their income and livelihood were safe. The lockdown between end-March and June 2020 had the most debilitating impact on the economy. In Q1FY21, the Indian economy shrank 24.4 per cent, the maximum among major economies. For FY21, India's GDP is projected to contract 8 per cent according to government estimates.

If that was the main reason to avoid a lockdown, the current state of the economy may have been another. India's economy, which was slowly inching towards normalcy and growth between July-December 2020, appears to have hit a major roadblock during January-March 2021. The Index of Industrial Production (IIP), an indicator of manufacturing activity across sectors, has lost steam and the output of eight core sectors registered the steepest fall of 4.6 per cent in February. The Purchasing Managers Index (PMI), a barometer of supply chain movements in the manufacturing sector, fell to a seven-month low, foreign investments have slowed, car sales declined and inflation has risen. These and most other indicators point to an economic recovery that is stalling, if not already stalled.

With the second wave of Covid-19 - much fiercer and more devastating than the first - engulfing the country, a fragile last-quarter performance would mean performance during the first quarter of FY22, with all its pandemic-linked disruptions, is going to be way below expectations. This was indeed a quarter that was supposed to herald a quick recovery for FY22, particularly due to the low base effect of April-June FY21, when the Indian economy shrank 24.4 per cent. Economists were banking on at least a 26.5 per cent growth in the quarter for India to turn around GDP growth to 10.5 per cent in FY22. With Q1 likely to get nowhere near that, prospects for the fiscal look grim.

Even before this fiscal began, the last quarter of FY21 failed on many economic fronts. It did not reflect the burst of growth witnessed during July-December FY21 after the easing of lockdown in June 2020. Was that growth a mere manifestation of pent-up demand due to a quarter-long lockdown last year? Has the Indian economy stalled already?

Not really, says the finance ministry. Economic revival will continue despite the second wave of infections. "(Economic) revival was happening, is happening and will continue to happen. Sentiments do not fall so rapidly. You will withstand this challenge also. Year 2019 was about liquidity (crisis), 2020 was about Covid (crisis), but 2021 shall not be about Covid, in spite of the second wave. I want to assure you," Finance Minister Nirmala Sitharaman said while addressing members of the Merchants Chamber of Commerce & Industry in Kolkata recently.

Rajiv Kumar, vice chairman of NITI Aayog is more cautious. "Apart from direct impact on some sectors like services, the second wave will increase uncertainty in the economic environment which can have wider indirect effects on economic activities. So, we need to prepare for greater uncertainty, both in consumer and investor sentiments," he says, while maintaining the country will see an economic growth of 11 per cent in the current financial year.

Most brokerages though are not that optimistic. They have downgraded estimates after factoring in the surge in Covid cases and the resultant restrictions. Nomura has cut economic growth projections for FY22 to 12.6 per cent from 13.5 per cent projected earlier. JP Morgan has revised it downwards to 11 per cent from 13 per cent earlier. UBS has curtailed it to 10 per cent from 11.5 per cent. One thing is certain. India's economic revival is not going be as smooth as Sitharaman and Kumar like. Ominous signs were there in the last quarter of 2020/21 itself. The raging health emergency has only made India's path to economic revival tougher.

Ominous Signals

The government's claims notwithstanding, one of the key macro-economic indicators - IIP - has meandered in the negative territory for at least nine out of 12 months since the Indian economy confronted the Covid-led challenges beginning March last year. Since then, IIP has remained in the positive zone only in September, October and December last year, largely on account of pent-up demand post lockdown and festive demand. The IIP contraction has only grown wider in February at (-)3.6 per cent, against (-)1.6 per cent in January.

In February, when the contagion had largely subsided and there were no restrictions, manufacturing and mining contracted by 3.7 per cent and 5.5 per cent, respectively, a further deterioration compared sequentially with January 2021, when manufacturing shrank by 2 per cent and mining by 3.7 per cent. There were no Covid-led disruptions in the form of restrictions or localised lockdowns then.

Core sector output, too, shrank 4.6 per cent in February, registering the steepest fall in the last six months. It declined 6.9 per cent last August. The pre-Covid level for the core sector was a growth of 6.4 per cent in February 2020.

The rapid spread of the contagion in March and April has the potential to jeopardise the fragile recovery further. Experts believe India's Covid curve, which started rising towards end-February and beginning of March this year, will have a bearing on growth in coming months. The PMI gives a sneak peek into what's in store for the future, especially in the aftermath of the raging Covid-19 numbers and subsequent disruptions. IHS Markit data released earlier this month revealed manufacturing PMI for March fell to 55.4 from 57.5 in February.

Economists are of the opinion that the surge will impact IIP and near-term momentum of the economic revival. "The Covid surge and localised lockdowns will definitely hamper industrial activity. Additionally, contact-based services will also be impacted. With this the revival that we were expecting to come about in the next two to three months will get postponed. The near-term sequential momentum that we expected in the first quarter is going to take a hit for sure," says Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank.

Bhardwaj rules out an impact as bad as FY21, but says caution is the keyword in the near-term. Kotak Mahindra Bank has revised its FY22 growth projections downwards to 10 per cent from 10.5 per cent earlier. On gross value added basis, the downward revision in the bank's projection is to the tune of 80 basis points.

Inflation is another concern. While last year, rise in the inflationary pressure in the economy was largely due to supply side disruptions due to the lockdown, this time higher global commodity prices are stoking inflation. Retail inflation rose to 5.52 per cent in March, against 5.03 per cent in February. This is a rebound from December and January levels when headline inflation cooled off after hovering over the upper tolerance limit of 6 per cent for six months between June and November 2020. Food inflation went up to 4.94 per cent in March, against 3.87 per cent in February.

Equally ominous is the fact that price rise is under segments that directly impact household savings and may have a bearing on the revival as most household income is likely to be deployed towards it, reducing the scope for spend on white goods and consumer durables.

A close examination of March retail price inflation - measured as Consumer Price Index (CPI) - reveals prices of oil and fats have risen 24.92 per cent this year, compared to the same period last year. Similarly, prices of pulses and products jumped 13.25 per cent, while in meat and fish it is 15.09 per cent in March 2021 over the same period last year.

Explaining the reasons behind the rise in inflation when there is no lockdown-led supply chain disruption and subdued demand, Sunil Sinha, Principal Economist and Director, Public Finance, India Ratings and Research says, "Global commodity prices started spiking from September onwards. Because of low demand, businesses, too, had been absorbing cost pressure and raising prices. However, input prices have reached a level where industries cannot absorb them any more as margins will be impacted badly. Now they have started passing on the prices to consumers. This will reflect in both WPI and CPI."

Meanwhile, acknowledging that the jump in Covid-19 numbers and localised lockdown will "add uncertainty to growth outlook", the Reserve Bank of India (RBI) has maintained that impetus has to be given to growth. According to the minutes of the Monetary Policy Committee meeting held earlier this month and released on April 22, RBI Governor Shaktikanta Das observed, "The need of the hour is to effectively secure economic recovery underway so that it (GDP growth) becomes broad-based and durable. In such an environment, monetary policy should remain accommodative to support, nurture and consolidate the recovery".

Key To Growth

On April 13, manufacturing hub Maharashtra imposed a state-wide curfew with severe restrictions on people movement and business transactions. Delhi followed with a six-day lockdown till the morning of April 26. Jharkhand has a lockdown in place from April 22-29. What is driving these states to take such measures is the record number of Covid-19 cases. The impact is there to see. According to an SBI report, the Maharashtra lockdown could result in Rs 81,672-crore impact on the state's nominal GSDP.

Migration of labour, disruption in supply chain, decline in demand for non-essential goods, and a big aversion towards services where social distancing becomes difficult - The fact that all these disruptions are happening during the quarter (April-June FY22), that is expected to deliver 26.5 per cent GDP growth (on a low base), makes growth estimates doubtful. We are in for some trouble, especially when it comes to achieving the full fiscal growth targets.

"Even though it is an evolving situation, Covid-related restrictions being imposed now are very different in nature compared to last year. Then there was a complete shutdown for two months. This time it may be in pockets, but won't be in a continuous form. This time disruptions will be there and downsides to earlier growth forecasts. There will be marginal revisions. The economic damage will be much less," says Sinha of India Ratings and Research.

According to the rating agency's revised projection, the economy is expected to grow at 10.1 per cent in the current fiscal against 10.4 per cent forecast earlier. Even though India Ratings' original projection was conservative compared to its peers and had factored in the second wave, the agency has made a marginal downward revision.

N.R. Bhanumurthy, Vice chancellor, Dr B.R. Ambedkar School of Economics University, also points out that there is an increase in uncertainty regarding the sustainability of the economic recovery. "We have seen some recovery during October-December FY21. Several economic indicators had gone back to pre-Covid levels as well. But, with the kind of Covid positive cases we see right now, almost three times the peak of the first wave, certainly there is huge uncertainty," he said, adding, the first quarter of the current fiscal would face more risks in terms of slowdown.

"I see infections rising. I don't know if it will go to 4-5 lakh cases a day, but it is widespread. The governments are likely to adopt more frequent lockdowns like the ones in Mumbai, or Delhi. This is going to impact the economy seriously," says Subash Chandra Garg, Former Finance Secretary. He is particularly concerned about the services sector, construction industry, and entertainment, travel, etc. "I see contraction in demand taking place and also some sort of supply disruptions. Earlier I was expecting Q1 to have around 30 per cent growth, building on the 24 per cent contraction last year, which would have virtually brought it at par with Q1 FY20. But, now Q1 growth will be somewhere between 15-20 per cent, not 30 per cent any longer," he says. According to Garg, by the end of Q1, India's Covid-19 cases should peak and things should start looking better, from Q2 onwards.

Meanwhile ICRA, a Moody's Investor Service Company, in its monthly review of the Indian economy for March pointed out that the base effect-led surge offered hollow solace with the contagion rising and restrictions.

"Economic activity in India recorded a broad-based and sharp improvement in terms of the pace of year-on-year (Y-o-Y) growth in March 2021, relative to the previous month, reflecting the low base related to the commencement of the Covid-19 pandemic, the early restrictions and the subsequent lockdown in March 2020. However, this offers limited solace in light of the recent rise in Covid-19 infections in India, and the proliferation of restrictions that are currently underway," the ICRA report said. According to ICRA some sectors are already showing the signs of wilting under the contagion surge heat.

"Some indicators such as domestic airlines' passenger traffic, vehicle registrations, electricity demand and generation of GST e-way bills, have revealed an incipient slackening in performance in March or April this year. The extent to which infections continue to rise, and restrictions are expanded, will guide the pace of Y-o-Y expansion in the ongoing quarter, on the subdued base of the lockdown."

A Crisil report titled "Grim Statistics" dated April 20 authored by Chief Economist Dharmakirti Joshi also points at softening of the electricity consumption in addition to GST e-way bills during the week of April 12 and April 18. "More states are beginning to impose localised restrictions on people movement and commerce to control the spread, falling just short of a complete lockdown. But so far, electricity consumption and Goods and Services Tax (GST) e-way bills collection, which are used as proxies to track economic activity, have softened only somewhat. Given the volatile nature and revisions of daily/weekly data, it needs to be seen whether the softening in these indicators is a blip, or marks a shift in trend," according to the report.

How To Overcome?

The fact that the weakening of growth, coupled with Covid-19 disruptions are going to harm India's economic interests is clear. Last years' experience has taught us the major pain points. The question now is how to minimise its impact and sustain growth. Can Central and state government policies help generate demand, raise consumption and address liquidity issues of MSMEs and large businesses?

"The issue is that whatever policy was pursued, whether it be foodgrain entitlement, moratorium on loan, emergency credit, or suspension on Insolvency and Bankruptcy Code (IBC), among others was in response to a particular situation. Now the situation has prolonged. In response to the second wave and its impact, policy initiatives taken to mitigate the pain earlier has to be continued depending on the need. Wherever they have ended, they need to be reinitiated after due-diligence to help affected sectors, groups or individuals survive the second wave," says India Ratings' Sinha.

Bhanumurthy says it is too early to say whether a (stimulus) is required, or not. "To be fair to the government, the finance minister as well as the VC Niti Aayog have come on record that as and when required, they would certainly get back to any kind of stimulus measures that is required. That is exactly what they have done last year also. They did it on a case-by-case basis and my feeling is that it has worked well for us. This year also they may look at the situation case by case," he said.

Bhanumurthy also feels this time around, states may not be offering localised policy interventions in a big way. "Last year they were upfront. Kerala, Maharashtra, Karnataka, all announced sops (to address the economic crisis caused by Covid-related distress). Those things may not happen until and unless we go for a complete lockdown, the probability of which is very limited. In that sense, states may not be active, it will be the Centre. States may be focusing more on health infrastructure and not look at fiscal intervention," he said.

Former Finance Secretary Garg says the Centre's policy intervention should be mostly around the Garib Kalyan Package that preceded the Atmanirbhar package for businesses and industries. "The only real relief the government provided last year was the Garib Kalyan Package, which was extended. Last year, two sectors that needed government help were SMEs and the labour force working there. This time also SMEs are going to be worse-hit, and this will be linked to job losses, unemployment. Nobody thinks things will be normal anytime soon. This might lengthen to at least two to three months. So the government should bring back a modified Garib Kalyan Package, provide assistance to families like last year, but adopt a more nuanced and targeted approach for SMEs and labour employed by SMEs."

"The government missed the opportunity of creating the database of 8 crore SMEs in the country. We should now create a complete database of SMEs and the labour working there. Any MSME or worker out of job should be helped. I would say the government should come up with a package for SMEs and labour force employed there," he adds.

Meanwhile, experts have ruled out any fiscal stimulus such as intervention to boost consumption in the economy. Kotak's Bhardwaj says the priority for both Central and state governments should be to work on health infrastructure. "I do not see that (fiscal stimulus) happening as the wherewithal to do so is limited and public finances are in bad shape. That said the government will have to be on a wait-and-watch mode. In case there is any sectoral requirement, it may have to take a call on it," she says.

Aurodeep Nandi, India Economist and Vice president, Nomura Financial Advisory & Securities (India), says growth is currently being held back 'artificially', restrained by lockdowns and public risk aversion. "The most sustainable way to get the growth momentum on track is to deal with the underlying health crisis - flatten the pandemic curve, accelerate vaccinations, and eventually ease restrictions." According to Nandi, the wriggle room for fiscal and monetary policy in the meantime is somewhat limited. "On the fiscal side, the government may choose to refresh its first wave support schemes targeted at vulnerable sections and credit support for MSMEs. On the monetary policy side, the RBI has already doubled down on its messaging to keep all three levers - rates, forward guidance and liquidity - in easy position, with a focus on flattening the yield curve and keeping broader financial conditions supportive of growth recovery. We believe the RBI will possibly head back to the normalisation theme only when it is convinced near-term growth headwinds have been sufficiently staved off," he says.

Meanwhile, Chief Economic Advisor Krishnamurthy Subramanian observes that some key announcements made in Budget 2021/22, including PSU bank privatisation, setting up a Development Finance Institution and a bad bank (an asset reconstruction company), can push the economy on to the growth path irrespective of Covid-19.

In a virtual interaction with the national executive committee members of apex chamber FICCI on April 21, Sitharaman expressed the view that the government is positive about its growth strategy for the Indian economy in the midst of the pandemic. She said with the PM's televised address to the nation, along with new vaccination guidelines and the five-fold strategy adopted in handling Covid-19 cases - test, track, treat, Covid protocols and vaccination - there will be a sense of reassurance. "With all these steps, we should hope to see a positive change in the way the second wave of the pandemic is moving. Industry is watching out and I would want you (industry) to keenly observe what is going on and we are together with the industry in (fighting) this (pandemic). I am sure all of us together will understand how best to now ramp-up and sustain the growth momentum, which all of us are keen to see between the last quarter and this quarter," Sitharaman told the FICCI leadership. Niti Aayog Vice chairman Kumar is confident that "the government will respond with fiscal measures as and when required."

Centre's consumption-revival measures adopted last year are still a work in progress. Boosting investment and reviving consumption were the twin objectives of measures like Production Linked Incentives (PLI), enhancing capital expenditure and investments in infrastructure sector. With Covid 2.0 hitting India hard, the government will have to speed up efforts in each of these segments. From the year-go situation, the PLI scheme has a concrete character and targets 13 segments with new employment opportunities. Similarly, infrastructure spending is progressing at a swift pace. The net result will be more money in the hands of the consumer, eventually boosting spending.

During the RBI MPC meeting, member Shashanka Bhide, according to the minutes of the meeting, said "A broad based recovery covering all production sectors and micro, small and medium enterprises and employment to support consumption demand is needed to sustain this revival." Mridul K. Saggar, another MPC member, stated that both consumption and investment need to be stimulated. Consumption needs support from removing credit frictions and more redistributive policies.

For now, a slowdown in the revival is a reality, but one is not sure about the size of its impact. The progress of Covid-19, and government response will decide how the Indian economy will fare in the coming months.

@joecmathew; @eco_no_money

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