Why economists remain pessimistic amid signs of economic recovery

Some believe recent indicators like GST numbers are overstated, most are sceptical about the impact of a stubborn pandemic

A host of high-frequency indicators that came up recently pointed to the emergence of green shoots in  the economy.  Goods and services tax (GST) collections, purchasing managers' index (PMI) for manufacturing and export growth, all for the month of September, seemed to signal recovery in the economy.

September GST collections, for instance, were not only the highest in seven months at over Rs 95,000 crore but were also 4 per cent beyond the mop-up in the same month last year. The same was the case with exports, which rose 5 per cent in September year-on-year, representing the first growth in outbound shipment in seven months. Other indicators such as fertiliser sales, purchasing managers’ index (PMI) for manufacturing, peak power consumption growth, car sales all pointed to a resurgent economy.  

So why economists are projecting double-digit economic contraction for the current financial year? Are they pessimistic, given that they had, in fact, revised their projections to show greater contraction after the release of the first quarter GDP numbers, which showed a 24 per cent decline?

To this query, the former chairman of the Prime Minister's Economic Advisory Council (PMEAC), C Rangarajan, said, "I had originally expected an improvement and that we might even have small growth. But that I think is not possible now. For the year as a whole, the rate of growth is going to be negative."

But then, how deep it will be depends upon what happens in the second half of the year, he said.

"If the pick up becomes stronger in this period, there will be a negative growth for the year, but it may not be as deep as some analysts have predicted. I keep my fingers crossed," Rangarajan said.

Former chief statistician Pronab Sen said," I think they (economists) have begun to realise the seriousness now. Prior to this, they were simply optimistic."

He said only he and Arun Kumar, who is the Malcolm Adiseshiah chair professor at the Institute of Social Sciences and had earlier taught economics at Jawaharlal Nehru University, projected double-digit contraction in May itself.

"I have been saying there will be 12.5 per cent GDP contraction in FY21. I have not changed my projections," Sen said.

Kumar projected the economy to contract by 25 per cent, and asserted that most economists are behind the curve.

In April, when the economy was down by at least 75 per cent, some of them had still projected growth, he said.

"IMF was talking about growth. They were way behind the curve. That is what had happened at the time of the global financial crisis during 2007-08. International agencies want to be very cautious," Kumar pointed out.

Sonal Varma, managing director and chief India economist at Nomura, said, "The larger-than-expected contraction of close to 24 per cent year-on-year in first quarter of 2020-21 led us to recalibrate our growth outlook. We have lowered our GDP growth forecasts to -10.8 per cent from -6.1 per cent in FY21."

She said the growth rates are likely to remain negative over the next three quarters (-10.4 per cent in Q2, -5.4 per cent in Q3, and -4.3 per cent in Q4 of FY21). 

"The shape of the recovery will ultimately depend on the evolution of the pandemic curve and recovery from the health crisis; a speedy resolution is an upside risk to our projection. However, the potential exacerbation of the health infrastructure due to the pandemic spread raises risk of localised lockdowns and is a downside risk to our forecasts," Varma said.

Thomas Rookmaaker, director-sovereign ratings, Fitch Ratings said the pick-up in high-frequency indicators is in line with the rating agency's GDP growth projection of -10.5 per cent for FY21. 

"In particular, the improvement in trade data, GST collections and the services PMI, point to a gradual normalisation of economic activity in India from the near stand-still following the strict lockdown earlier this year. We project a rebound of 11 per cent in FY22 fed by base effects and pent-up demand," Rookmaaker said.

Devendra Pant, chief economist at India Ratings, said the agency adhered to its FY21 forecast of 11.8 per cent contraction in GDP and 11.9 per cent decline in the second quarter of the year. 

Icra's principal economist, Aditi Nayyar, who was quite close to the official Q1 GDP contraction figure, with a projection of 25 per cent, said,""Overall, with fresh infections remaining elevated, we think that behaviours of economic agents will remain altered over the next two quarters at least, supporing our view of an 11 per cent contraction in GDP in FY21," she said.

Kumar said the first quarter GDP contraction of 24 per cent was under-stated.

In fact, the NSO document says it did not have the complete data. "In the case of poultry and milk, NSO said it is only looking at the targets. If you are looking only at targets and there is a lot of spoilage in these, and you are not even correctly projecting agricultural growth. So 23.9 per cent decline calculated by NSO for the first quarter of 2020-21 was more likely a 40 per cent decline," Kumar explained.

He said NSO used GST collection figures and corporate sector results for many of the computations.

Corporate sector results came from companies that were doing well and others are now going to file in September, he said. Even the corporate sector results are based on firms in the pharma, IT and other sector that fared well.

"So it did not take into account the unorganised sector, and even in the organised sector, it took only companies that did well,' Kumar said.

He said GST numbers are gross figures and overstated, particularly for September. "I have talked to some businessmen. They told me that their refunds for the past were not allowed," he recalled.

Besides, all companies whose annual turnover is below Rs 5 crore were given time till September to file returns. Those above this threshold were given time till June. So, there was lumping in June and there was lumping in September, Kumar elucidated.

"A large part of your services are not functioning properly and they pay huge GST, so how come your collections improved in September over the last year's figure? My feeling is that GST figures are overstated. So refunds that are due but made should be netted out of the gross figure in order to give the correct picture," Kumar said.

Varma said it is normal for the pace of recovery to moderate as we move away from the lockdown phase, as the scope to recover every month diminishes progressively and pent-up demand tends to fade. 

"After a swift recovery in activity thus far, we expect the sequential pace to slow down in H2FY21, as new infections remain at elevated levels and as the pandemic is having an adverse impact on household jobs and corporate profitability," she said. 

Nayar said her assessment is that the pace of revival is rather fragmented across sectors. "A sharp recovery in some areas is being led by factors whose sustainability is uncertain," she said.

On the other hand, some sectors are showing a stagnation at pre-Covid levels, she said. 

Nayyar's views are supported by the fact that non-oil, non-gold imports declined 13 per cent YoY in September YoY, and  more than halved from around 30 per cent the previous month. This category is important to gauge domestic demand.

Besides, the credit-deposit ratio has been declining for three straight fortnights, the last of which ended on September 11, as deposits grew at a higher pace despite low interest rates, even as credit growth declined.

Similarly capex on new projects was down 81 per cent in the second quarter over the corresponding period last year. 

Rookmaaker said," There is still some way to go in the normalisation process: for instance, imports in September were about 20 per cent lower year-on-year. Moreover, the recovery is subject to significant uncertainty, especially given the persistently high number of daily Covid-19 cases in India."

Pant said economic activities have improved in September. "However, it is too early to call this a trend. In the recent past too, we have observed that after an improvement in a month or two in high frequency numbers, growth trends collapse," he pointed out. 

The latest positive number for September is 3.9 per cent YoY increase in GST collections which have come on the base of 2.7 per cent decline in September, 2019, Pant explained. 

"October GST collection may also show a positive growth number. The challenge is to maintain this growth momentum, which at present juncture appears to be difficult," he said.