Economics is called a dismal science and veteran banker Kundapur Vaman Kamath would have none of it. An optimistic man, unlike professional economists who are seemingly engaged in the competitive sport of cutting India’s economic growth, he presented an ebullient view of the nation’s economic recovery in an interview with Network18.
Kamath said he did not see the Indian economy as having a “hard landing”. He also sees the contraction in economic output to be of a lower degree than what most people are predicting, citing high frequency indicators. That’s quite a contrast to most other predictions. Remember that the International Monetary Fund has projected India’s GDP to shrink by 4.5 percent in the current financial year. Others such as Fitch Ratings (-5 percent) and Nomura Research (-6.1 percent) are even more pessimistic.
But high frequency indicators show that Kamath’s optimism is not baseless and that the economy may have bottomed out from the COVID-induced stress. Indeed, as the Moneycontrol Pro economic recovery tracker shows, there is a rebound happening across various sectors.
Rural India remains a bright spot in the economy. The monsoon rains are good. Cumulative rainfall as of July 3 is up by 11 percent over its long period average (LPA), as the Moneycontrol Pro monsoon watch tracker shows. Sowing levels are higher than what they were a year ago and this could lead to an increase in farm income if the government’s recently announced agricultural sector reforms are executed well. Indeed, we can see a reflection of this optimism in commentary from the packaged consumer goods industry, which has its ears to the ground in rural India.
In the rest of the country, we have seen power consumption levels pick up as industries and commercial establishments resumed work. Thanks to this, unemployment levels have recovered sharply from the lows of April and May. The government’s thrust on rural employment through increased allocations to the Mahatma Gandhi National Rural Employment Guarantee scheme and the PM Garib Kalyan Rojgar Abhiyan also seems to have helped.
Car and two-wheeler vehicle registrations, an indicator of retail sales, have accelerated over the past couple of weeks providing evidence of consumer discretionary spending. And so too does the fact that television advertisement spending is around 125 percent of pre-COVID levels now (Jefferies data). Other indicators such as improving 8-sector core industry output and e-way bills show that the recovery is fairly broad based and spread across the economy.
So clearly, green shoots are visible. But there’s a caveat. Remember that India had seen one of the most stringent lockdowns in the world for well over two months. There is bound to be a lot of pent-up demand in many categories because many factories were not producing at all or at low capacities in April and May. Companies and households would be restocking inventory. Even now, production levels in many categories are not fully back to pre-COVID lockdown levels.
That’s why the most recent purchasing managers’ index data – the India Composite PMI for June – is worrying since it showed a contraction even after lockdown restrictions were relaxed. Remember that the PMI is a yardstick that measures month-on-month changes in private sector economic activity and one would have expected it to show an improvement over May. Moreover, in some indicators that are improving, the pace of recovery is slowing.
Pent-up demand apart, other factors need to click for the recovery to sustain. For one, there should be no further lockdowns. It is true that new COVID-19 cases in India are continuing to increase, with the country adding about 23,000 fresh patients daily. But as the experience of April and May shows, a majority of our countrymen eke out a hand to mouth existence, and a strict lockdown with dismal employment prospects will put them in more distress. The focus of the fight against COVID should be on testing, quarantining and building health infrastructure.
Second, for all the talk of India being Aatmanirbhar, the rest of the world needs to show a recovery as well. Exports seem to have bottomed out. But unless there is sustained recovery in our trading partners, we can wave goodbye to that engine of growth. Remember that government spending can push the economy only so far when consumption is faltering.
Moreover, while the recovery is being talked of in pre-COVID levels, remember that the Indian economy was slowing down even before the pandemic struck. GDP growth for the March 2020 quarter, which saw about 10 days of lockdown, had plummeted to 3.1 percent. The old problems of distressed balance sheets, rising bad assets in the financial system and tepid corporate earnings remain. Double digit growth is still far away.
Of course, the prescriptions to grow at double digits are familiar. India needs more structural reforms, more ease of doing business and more innovation and competitiveness. The China stand-off and the realisation that it is not easy to boycott a large trading partner brings these prescriptions into sharp focus and clearly shows the path ahead.
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