There is general optimism about recovery and economic prospects in 2021. The basis for this is redoubtable: a steady turnaround of most economic data and mobility indicators, declining infection rates, easy financial conditions, favourably poised external settings driven by hopes of vaccine advancements and fresh United States stimulus, among the significant factors.
India’s GDP is now expected contracting much less at -7.7 percent, suggesting output recovery to near-FY20 level in the second half of FY21. The anticipated rebound to the pre-COVID-19 state in a much shorter span implies the pandemic perhaps did not have a significant impact upon the economy, except maybe a few services. Is that the reality or is the recovery sentiment puffed up?
There are opposing indications that combine with deficient information in crucial aspects to suggest caution. For instance, there is no matching pick-up in bank credit that is still subdued; daily surpluses invested back by the banks with the central bank haven’t declined in synchronisation; the cheaper, short-term funds mobilised by large firms are deployed for reducing leverage or held in cash rather than increasing business expenditures; consumer credit is depressed; credit-rating downgrades are exceeding upgrades; more persons were unemployed last month compared to a year before (15 million); while the state of the large informal economy or about 45 percent of GVA is unknown.
Further, the key price signals are suppressed due to emergency and other interventions. Other information is either unavailable or incomplete. Bond yields, for example, do not reflect inflation and fiscal risks, keeping out market views and reactions. The exact evolution of nonperforming assets (NPAs) due to the COVID-19 shock is not known because loans under moratorium, which ended last August, are under court injunction that precludes such classification. Neither is up-to-date information on lending by NBFCs, which reach beyond bank borrowers, available.
It is difficult, therefore, to see the improving real economy mirror on the financial side; and to gauge if and to what extent, the financial sector stress has increased post-COVID-19. Both market signals and complete information would provide an accurate grip upon the nascent recovery.
There are also some puzzles about sustainability, the behaviour and intent of the private sector.
For example, is the extraordinary rise in corporate profits of last September quarter a one-off or sustainable? Is this mainly sourced to cost-savings from deferred expenditures and lowered stocks, in which case these may not maintain? Or does this represent genuine increase in efficiency and productivity, which would indicate durability of growth in a lean demand environment?
There are equally hard questions about the buoyant fund-raising through initial public offerings of equity issues in the second half of 2020. Confined to private financial entities, the purpose is unclear, viz. whether for reputational reasons, or insurance for higher future provisions against anticipated increase in NPAs, or growth-capital augmentation for loan demand increases. IPOs by nonfinancial entities, which were muted in April-November 2020 and restricted to private debt issuance and commercial paper, could indicate caution and short-term planning, but one cannot be sure.
These counter signs and information gaps make demand readings very difficult. These are already complex because the COVID-19 shock is exceptional. At present, it is hard to tell how much of the rebound is due to pent-up demand, how much is back-to-regular or maintainable, if there are discrete shifts in some components, and so on.
Even producers find it impossible to disentangle these effects and obtain a clear measure for future planning. This creates uncertainty about future sustenance also because it’s difficult to gauge if demand is fully or partially recovered, and what exactly is the quantum of loss or shortfall. For instance, a faster-than-expected rebound to pre-COVID-19 conditions means the output losses from the pandemic are purely temporary or short-lived and there’s no permanent destruction. But can the private planner be sure?
The cumulative uncertainties about demand feed back to the private sector, holding back the translation of positive sentiments into more concrete changes. Despite the recovery and improved outlook, private business will hesitate to commit or risk any capital before being sure of future demand.
So we can celebrate that 2021 is going to be a leap improvement over 2020, but await assurance the recovery is sustainable and economy fully out of the woods for now.