Less than half of the 16 high-frequency indicators considered in Mint’s
macro tracker were in red, or below their five-year average trend, in March,
the best performance since April 2020
The second wave of covid-19 infections in the country has dealt a much
bigger shock to India’s health system than the first wave last year. But the
economic shock may be more moderate compared to last year.
One big reason for that lies in the lockdown rules this year which allow
greater relaxations for industrial activity and movement of goods than last
year. Unlike last April, when large parts of Indian industry was forced to
shut down because of a long nation-wide lockdown, this time has been
different.
State governments have taken the lead in imposing restrictions this time,
and they seem to have learnt some lessons from the devastating lockdown
of 2020. The impact of the second wave on industrial activities thus far
remains small, a 26 April note by economists at ratings agency CRISIL Ltd
said.
The fact that vaccines are available this time unlike last year provides
another reason for hope. As vaccination opens up and vaccine availability
improves in the coming months, it is expected to provide a shield against
severe disease, if not infections .
Yet, as more and more local authorities impose lockdowns, mobility will
take a hit, and high-contact sectors such as hospitality and tourism will be
severely impacted. The urban informal sector could also be hit hard. While
economic output is likely to be impacted in the April-June quarter, the
medium term outlook appears stable, wrote economists at Nomura in a note
to clients dated 27 April.
“Parts of the economy like manufacturing, agriculture, or work-from-home
and online based services should be resilient... as the pace of vaccinations
pick up (which we expect should be evident from June), there should be
another return of pent-up demand, in addition to other tailwinds (strong
global growth, lagged impact of easy financial conditions, and front loaded
fiscal spending)," said the note by Nomura economists Sonal Varma and
Aurodeep Nandi.
Recovery Interrupted
The latest monthly data for economic indicators, available as of March,
suggests a healthy pace of economic recovery in the country. Seven of the 16
high-frequency indicators considered in Mint’s macro tracker were in red,
or below their five-year average trend, in March, the best performance since
April 2020. Five were in green, or above the average trend, while the rest
were in line with it. In February, half the tracker had been in red.
While the pace of economic recovery will likely slow down by the time the
next edition of the tracker is published, the slowdown is likely to be less
severe than last year. Mint’s macro tracker, launched in October 2018, saw
its lowest point in April 2020 when almost all indicators turned red as
economic activity came to a halt thanks to the world’s most stringent
lockdown.
Since then there has been a slow recovery that has picked up some speed
since late last year. Given the unusual contraction in most high-frequency
indicators last year, it makes it difficult to assess year-on-year growth
figures. To get a better pulse on the economic momentum in the country,
the Mint macro tracker will consider the annualized growth over a two-year
period (with 2019 as the base year) in all cases where the year-on-year
growth was used previously. This also helps us side-step some of the
contentious data from last year, such as that relating to inflation. Finally, to
present a more real-time picture of labour market trends, a new indicator
has been added to the tracker: the monthly labour force participation rate,
as reported by the Centre for Monitoring Indian Economy (CMIE) based on
its nationwide surveys.
Weak Spots
The latest edition shows that the consumer economy continues to be a weak
spot, with only one indicator (tractor sales) in the green. One (vehicle sales)
is flashing amber. The other two indicators remain in the red, despite some
improvement. The producer economy fares a little better, with two of the
four indicators in the green. The external sector remains a mixed bag, with gradual growth in exports.
March’s exports grew at an annualized pace of 2.6% compared to March
2019. However, in major labour-intensive sectors, such as gems and
jewellery and leather products, the decline continued in March. Exports in these sectors declined at an annual pace of 1.3% since March 2019. This
indicates that the stress in the labour market continues.
Other labour market indicators - the rural wage rate and the labour force
participation rate - also suggest continuing stress in the labour market.
Taken together with the weakness in consumer demand, this suggests that
sustainable recovery in demand may still take time. After the shock of the
second wave subsides, we may indeed see pent-up demand powering the
economy for a while. But if labour market conditions remain weak, this will
act as a drag on the economy over the medium term. Persistent inflation is another threat, which can erode purchasing power of
households, and make it difficult for the Reserve Bank of India (RBI) to
continue its accommodative stance in the coming months. The resurgence
in covid-19 infections, “if not contained in time, risks protracted restrictions
and disruptions in supply chains with consequent inflationary pressures,"
RBI’s latest monthly outlook report on the state of the economy said.
Source: Live Mint, India Friday, 30 April 2021