The last fiscal year, which ended on March 31, has been no less than a roller coaster ride for India’s economy. Economic activity was hit hard thanks to a complete national lockdown announced by end of March 2020, with the economy only gradually opening up in the second half of the financial year. As a result, GDP growth contracted 16 percent year-on-year (yoy) in the first half of the financial year, with only marginal recovery (0.4 percent yoy) in the third quarter of FY2020-21. The government for its part provided a massive stimulus and expansionary budget to stimulate growth (a mix of both supply and demand-side measures). However, just when there was growing optimism over India’s economic rebound, the second COVID-19 wave has come as a rude shock to businesses and consumers alike.
India’s daily new cases have been hitting higher peaks every day, with the country contributing almost 20 percent to the global tally of fresh daily cases. The situation of course is quite alarming and worse than last year’s peak situation. In 2020, it took three months for cases to rise from daily cases in the 10,000s in mid-June to a peak of over 90,000 cases daily in mid-September, whereas in the second wave it took only six weeks for a similar expansion. The total COVID-19 tally in India now stands at over 13.8 million with over 172,000 deaths. Daily counts have soared, with over 185,000 reported on April 13.
The IMF upgraded India’s GDP forecast for FY2021-22 to 12.5 percent, while highlighting the downside risks to growth. The Reserve Bank of India, in its April monetary policy meeting, retained its conservative GDP forecast of 10.5 percent for FY2021-22 and left policy rates unchanged. Citing the risk of a second COVID-19 wave, the RBI predicted a quarterly trajectory of 26.2 percent in the first quarter of the fiscal year (April to June of 2021), 8.3 percent in the second, 5.4 percent in the third, and and 6.2 percent in the fourth.
Economists are divided. While many have retained their double-digit growth forecasts, others are quick to revise them downwards, taking a cue from current state curbs and partial lockdowns in some of the largest states, where the infection is spreading fast.
We discuss few key issues that need to be kept in mind when discussing India’s economic trajectory going forward.
First, states like Maharashtra, Madhya Pradesh, Punjab, and Chhattisgarh, which are witnessing the highest surge in COVID-19 cases, account for over 30 percent of India’s GDP. Partial lockdowns and curbs in these states could impact economic activity in the first quarter. If, like last year, these lockdowns get extended further due to uncontrolled infections, the damage could be even more extensive. While manufacturing may not be directly hit due to partial lockdowns, the impact on the contact services sector – areas like hospitality, travel, and tourism – will have a multiplier effect, as these sectors have strong backward linkages with other sectors of the economy. The RBI’s survey on consumer sentiment also paints a gloomy picture, as the consumer confidence index fell to 53.1 in March from 53.5 in January 2021 on the back of deteriorating sentiments about the general economic situation. Expectations for the year ahead also witnessed a 9-point dip.
Second, even though economic activity has rebounded, high-frequency indicators suggest that the recovery has been uneven so far. While leading indicators like the Purchasing Managers’ Index (PMI), tractor & two-wheeler sales (signifying rural demand), Goods and Services Tax collection, E waybills, and rail freight traffic showed sustained growth in 2021, the broader indicators like the Index of Industrial Production (IIP), core sector performance, exports, and passenger vehicle sales are witnessing an uneven recovery path.
Core sector performance, which represents eight infrastructure industries, in particular has been rather dismal. After six months of contraction starting March 2020, the headline index did not pick up, with the average growth rate from September 2020 to February 2021 at -0.8 percent. This is particularly worrisome as these sectors have strong backward and forward linkages with other industries, and an increase in activity in these industries can have a multiplier effect on the output and jobs of other sectors as well. The eight core sectors comprise coal, electricity, crude oil, natural gas, steel, cement, fertilizers, and refinery products and account for almost 40 percent of the weight in the IIP index. Except for electricity, steel, and fertilizers, other core industries still have not rebounded following the pandemic shock. If core sector performance is anything to go by, India’s IIP numbers will not see any significant revival in the coming few months. Industrial production has remained flat (0 percent growth yoy) since September 2020.
Third, within manufacturing, recovery has been quite fragile, with different sectors recovering at different speeds. For example, food products, chemicals, pharmaceuticals, rubber and plastic, base and fabricated metals, computer, electronic and optical, electric equipment, machinery and equipment, automobiles, and transport equipment are back to a positive growth path. But textile, leather products, wood products, coke and refined petroleum, non-metallic minerals, other manufacturing, beverages, tobacco, apparel, paper, printing, and furniture are still not out of the woods yet.
Fourth, the government has limited fiscal space to bring about a massive support program in case things do go downhill. Due to uncertainty regarding the path of the pandemic, the private capital expenditure cycle will take time to recover; hence, it will be a wait before private investment provides any support to GDP growth. The government’s production-linked incentives scheme, however, could bring some relief to manufacturers who are planning to make investments in champion sectors.
Amidst all this gloom, of course, there are quite a few silver linings. Unlike last year, India’s vaccine drive is gaining pace. India has vaccinated over 100 million people (7 percent of the population) with at least one dose and fully vaccinated over 13 million people (1 percent of the population). This pace needs to be further increased. Also, agriculture growth and rural demand have been quite robust until now, which is expected to support growth. Moreover, support from the rebound in global growth and implementation of the Union Budget’s proposed capital expenditures will reinforce India’s economic revival.
Going forward, India’s headline growth numbers should be taken with a pinch of salt as the low base effect of 2020 will mask some of the undercurrents related to an already fragile and uneven recovery. With COVID-19 cases rising rapidly India’s future growth path will be no less than a bumpy ride.