Long road ahead

Economy still far from sustainable recovery path

The finance ministry has said that the economy is on the road to revival after the turbulent period following the nationwide lockdown, and has also listed a series of “green shoots” to back up this argument. Some of these are worth considering. The ministry pointed out that railway freight traffic improved by 26 per cent in May over April, and retail financial transactions on the national payments infrastructure went up from Rs 6.7 trillion in April to Rs 9.7 trillion in May. Consumption of petroleum products also rose by 47 per cent between April and May, and so did the value of e-way bills, by 130 per cent. 

These figures from the government, however, indicate nothing more than the fact that the initial weeks of the lockdown were the most stringent. The various indicators for May 2020 remain well below the figures for May 2019. In many cases — e-way bills, for example, were still 53 per cent lower in May year-on-year — they suggest that the economy is still in contraction in annualised terms, merely that the rate of contraction has slowed. The manufacturing and services PMI indices reflect this broader truth, as they were higher than their respective values in April, but still below the 50-point mark that indicates a consensus for expansion among managers. 
 

Among the fewer unambiguous positive signs is the spike in the sale of fertiliser, which grew by almost 100 per cent year-on-year in May. This is reflected in a solid increase in the acreage sowed for the kharif season, which is up almost 40 per cent since last year. Together with reports that this year’s monsoon appears normal in most respects, this means that the agricultural sector at least might provide some support to the economy and to the most vulnerable Indians going forward. It is worth noting that one contributor to this might be precisely the increased availability of manpower in rural areas due to the lockdown, its phased lifting, and the migration from cities. The government underlined the agricultural recovery, arguing that procurement of wheat in 2020 touched an “all-time record”, which was previously held by the year 2012-13. Given this fact, however, the government’s unwillingness to liberalise access to wheat and rice stocks under the public distribution system becomes more and more puzzling.

In terms of demand, it appears that production in fast-moving consumer goods is at 90 per cent of capacity but there is still deflation visible in raw materials such as palm oil and tea. This suggests that demand remains weak, though the impact of a good monsoon might help. Some signs of this are visible in the bellwether automobile sector, where tractor industry volumes stayed firm, and two-wheeler demand contracted less year-on-year than passenger vehicles, according to SIAM data. Overall, the government should not be too sanguine about revival at this moment. The fear should be that, as Covid-19 cases are still not falling in crucial areas, and the economy itself is showing relatively limited green shoots, India’s pandemic response has fallen squarely between two stools. Government must be on guard against overconfidence — there is a long way still to go.