Economic recovery on rough patch, second Covid-19 wave may dampen prospects

Gaps in recovery have been surfacing after the resurgence in new cases due to Covid-19 second wave, but the moderation in the pick-up seems to have begun well before.

While the International Monetary Fund has maintained ambitious growth estimates for FY22, the Reserve Bank of India has kept its forecast unchanged owing to a coordinated fiscal and monetary response. 

The second Covid-19 wave is likely to put India’s economic recovery off track. Gaps in recovery have been surfacing after the resurgence in new cases, but the moderation in the pick-up seems to have begun well before the second wave. 

Indicators began worsening in January, and the resurgence of the epidemic started in February. Come April, the disease began spreading faster than expected—and faster than the first wave. Partial lockdowns are back in Maharashtra, Delhi and other states. 

In fact, the National Statistical Office, the central agency on official statistics, marginally downgraded its estimate on India’s gross value added growth for the current fiscal. From its January prediction that real GVA will shrink 6.5 per cent in FY21, it said the fall will be 7.2 per cent in its February estimate. This, on top of a downward revision in real GVA growth for FY20. 

Despite the lower base, growth was revised to come in at a lower level than envisaged earlier. Now, while the more ambitious first advance estimates were based on data for merely seven months, the second advance estimates were based on data for about 10 months. More data resulted in a small moderation in assessment. 

If we look at data since January, a multiple set of indicators actually point to a moderation in the pace of recovery. To be fair, some indicators are keeping up the hope of a faster pickup.

Auto sales are a good indicator of demand in the economy. While sales of automobiles from original equipment manufacturers (OEMs) to dealers reflect broader demand, they include inventory as well. Sales at the dealer level to consumers, on the other hand, reflects real current demand. 

At that level, demand has moderated since the festive season ended, shows an analysis of data from the Vahan dashboard maintained by the Ministry of Road Transport and Highways. 

After crossing 60,000 vehicle registrations per day in November and December, they have consistently been lower than 55,000 per day from January to March. To an extent, this proves pent-up demand had a big impact on recovery indicators in that period. 

In fact, if we dig deeper into the data, the moderation in auto demand has been in the two-wheeler segment, suggesting that the rural consumers and small-ticket urban consumers may have restrained their demand after the festive season. 

Registrations of four-wheelers seem to be rising. Nevertheless, they shows a small moderation in March, a month when usually vehicle registrations peak. 

Volume indicators on the supply side in manufacturing look worrisome since the beginning of 2021. 

Recovery in the index of industrial production (IIP) was moderate and lasted only till December. The January index fell 1.6 per cent. In fact, if we account for the industrial slowdown of 2019, the IIP for January 2021 is now at the level of May 2019. 

Core sector output contracted 4.6 per cent in February, after being stagnant for five months. In a recovery, one would have ideally expected steel, cement, refinery, electricity output to rise sequentially, not fall off the cliff mid-way. 

The Nomura India Business Resumption Index (NIBRI), which tracks demand indicators such as power demand, labour force participation rate and mobility, tells us a lot about the recovery. The index considers February 23, 2020 as the base and tracks the movement each week after that. 

At the height of lockdown in April 2020, the NIBRI had collapsed to 45.3, meaning demand was less than half of what was seen in February 2020. As lockdowns were eased, and as the Covid-19 caseload began sobering, the NIBRI caught up, and demand came back to 99.3 per cent a year later on February 21, 2021. 

But since that week, NIBRI has only fallen sequentially, and has landed at 90.7 as on April 4, 2021, suggesting that today’s situation may have dented demand to the tune of 10 per cent, compared to a year ago. 

"An adverse impact is visible in mobility (particularly in Maharashtra), passenger transportation and other contract-based services. However, power demand remains robust and railway freight revenues continue to rise," Nomura said in a note.  

“If the second wave worsens, as is looking likely, sequential momentum in Q2 (April-June) would then likely be weaker and it could lower Q2 GDP growth,” it warned. 

Nomura slashed its growth estimate for Q2FY21 from 34.5 per cent to 32.5 per cent (over the previous year), while for the full financial year FY22, it pruned its estimate from 13.5 per cent to 12.2 per cent.

The RBI, while announcing its accommodative stance and status quo in policy rates, stuck to its growth outlook of February 2021. The central bank estimates the economy will grow 10.5 per cent this financial year, and real GDP growth will remain in the range of 5.4-6.2 per cent in the second half of FY22. 

As RBI’s estimate was the lowest among many agencies that track India’s economy, the fact that it was not raised could be a tacit admission that the second wave may have affected near terms prospects. Economists too think so. 

Aditi Nayar, principal economist at Icra, said in a note that the comeback of localised restrictions has pushed up uncertainty about the near term outlook, which is likely to persist until after all adults become eligible for vaccination, affecting growth prospects. 

“The pace of growth in the first half of FY22 is likely to be somewhat lower than our earlier forecasts. However, demand may get back-ended into the second half, boosting growth,” she wrote in a note. 

Another ratings agency, Crisil, pointed out that the weaknesses in demand recovery may affect credit outlook, and in turn weaken the supply side of the economy. 

“The sharp rise in Covid-19 cases since mid-February 2021 and the impact of stringent containment measures on businesses are key threats to the nascent demand recovery, and could impact the credit quality outlook adversely,” it said in a note. 

Though only six out of 42 indicators re highly sensitive to a Covid-19 resurgence in terms of adverse credit outlook, airlines business, hospitality and retail have a long road to recovery, it added. Gems & jewellery, and automotive dealers have benefitted so far with the suppressed demand breaking free.