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Analysis | As India enters festive season, economic recovery strengthens

Macroeconomic indicators show encouraging signs and consumption picks up, and policymakers and economists are now broadly confident the growth momentum will sustain, especially given that vaccinations continue at a brisk pace.

October 18, 2021 / 12:42 PM IST
Representational image.

Representational image.

It is an Indian policymaker’s dream scenario. More than five months on from the challenging second wave of the COVID-19 pandemic, almost all economic indicators are showing strong signs of recovery, and inflation seems to be well under control in spite of rising petrol and diesel prices.

Earlier this week, the International Monetary Fund’s latest World Economic Outlook report reiterated its India growth forecast for FY2021-22 at 9.5 percent and FY2022-23 at 8.5 percent. Both projections would make India the fastest growing major economy in the world.

Policymakers in the finance ministry, including outgoing chief economic adviser Krishnamurthy Subramanian, are now broadly confident that the growth momentum will sustain, especially given the fact that vaccination is continuing at a brisk pace, and say that any economic impact of a likely third wave will not be as severe as seen in earlier waves.


“When it comes to an economic recovery, there are a few patterns that are now clearly emerging. The number of vaccinations in September went up very sharply. This is expected to instil more confidence in the population and lead to a shift in consumer behaviour, therefore benefiting the contact-intensive sectors of the economy. The economic shock of the second wave is also fading,” Icra Ltd chief economist Aditi Nayar told Moneycontrol.


COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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 Marcos on strong footing

Macroeconomic indicators like the Index of Industrial Production have also been encouraging. As the low base effect slowly wears off, industrial production in India continued to stabilise in August, expanding by 11.9 percent year-on-year (y-o-y) in August, rising slightly from 11.4 percent in July.

Economists say that while the industrial output is still below the levels seen pre-COVID period (February 2020), it is recovering faster than post-COVID 1.0, which is an encouraging sign.

“The data reveals that the industrial output in August 2021 has reached 97.7 percent of February 2020 levels. It had gone beyond pre-COVID level in March 2021 but fell to 94 percent in April 2021. Despite the onset of the festival season, we expect gradual recovery in factory output,” said Sunil Kumar Sinha, principal economist at India Ratings.


This is also borne out by the fact that growth in the core sectors has steadily gained pace, registering 11.6 percent in August.

“While it continued to be driven by a base effect till August, on the whole core sector growth rate is encouraging as it points to further acceleration during the course of the year as the government gets down to spending more as indicated to all ministries,” Madan Sabnavis, chief economist at CARE Ratings, said.

Meanwhile, the Consumer Price Index-based (CPI) inflation for September 2021 came in at 4.35 percent, compared with 5.30 percent in August, data showed earlier this week. This is the lowest retail inflation print since April 2021.

The fall in headline retail inflation was primarily on the back of a sharp cooling in food inflation. CPI inflation has been well within the 4 (+/-2) percent target range of the Reserve Bank of India’s monetary policy committee since December 2020, except for May and June, when it crossed the 6 percent mark.

In spite of record petrol and diesel prices, headline retail inflation has not crossed the danger mark as far as policymakers are concerned. This is because almost 50 percent of CPI inflation is food inflation, which has more or less been under control.


 Auto sales indicate growing consumption

Data from the Society of Indian Automobile Manufacturers showed passenger vehicle sales for April-September 2021 rose 51 percent compared with the same period in 2020. Commercial vehicle sales, a reliable barometer for logistics and transport activity, rose nearly 65 percent in April-September over the same period last year.

However, two-wheeler sales for the same period rose 8.9 percent compared with April-September last year, indicating that the post-COVID recovery is yet to set in fully in semi-urban and rural areas.


Meanwhile, the government’s finances have been bolstered by strong revenue receipts. Goods and services tax (GST) collections in September came in at Rs 1.17 lakh crore, the second highest monthly gross GST collections this financial year.

This takes the total GST collection for the first half of fiscal year 2021-22 (April-September) to Rs 6.82 lakh crore. September was the third consecutive month that GST collections were above the Rs 1 lakh crore mark.

Net direct tax collections jumped 74 percent to Rs 5.71 lakh crore in the April 1-September 22 period from Rs 3.27 lakh crore a year earlier. Officials are enthused that net and gross direct tax collections are higher than pre-pandemic 2019-20 levels as well. Net collections as of September 22 were 27 percent higher than the Rs 4.49 crore in the same period of 2019-20, before the pandemic struck.


Minor headwinds expected

In spite of the encouraging vaccination numbers, policymakers still consider a possible third wave to be an ‘unknown’.

In its latest Monthly Economic Report for September, the finance ministry said that 10 states and Union territories have administered the first dose of the COVID-19 vaccines to their entire adult populace, while more than 60 percent of people in most states have received the first jab.

“The second dose coverage remains less than 40 percent in most states but is expected to pick up significantly in the coming months,” it added.

Even analysts suggest there could be some hiccups. “First, e-way bills are suggesting a slight moderation in domestic economic activity, second, the emerging power crisis due to domestic coal shortages and third, the disruption in global supply chain due to an energy crisis in Europe and China could play a spoiler,” India Ratings’ Sinha said.

While stressing that the indicators so far augur well for large parts of the economy going forward, Icra’s Nayar also cautioned that the festival season may still be overshadowed by the third wave. “Many people had lost loved ones during the second wave and that may still impact the way people spend their festivals,” she said.
Subhayan Chakraborty has been regularly reporting on international trade, diplomacy and foreign policy, for the past 6 years. He has also extensively covered evolving industry and government issues. He was earlier with Business Standard newspaper.
Arup Roychoudhury

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