Q1 snapshot of the Indian economy: Attaining recovery will be a long haul

The severity of contraction in economic activities due to Covid-19 is declining, but sustainable recovery is far away still. A K Bhattacharya explains the problems and positives for the Indian economy

India’s economic performance in the first quarter of 2020-21 bore the full brunt of the Covid-19 pandemic and the consequent lockdown. The phasing out of the lockdown began from June even as the pandemic spreads across the country at a steady pace.
 
Hence, a broad sense of the impact of Covid-19 on the economy could be formed after assessing how the various indicators of the Indian economy fared in the quarter of April-June 2020. What’s more, the numbers for the first quarter will provide a hint to the likely trajectory of the economy in the following quarters.
 
All the key parameters of India’s economic performance show that the severity of the contraction in economic activities is declining on a month-on-month basis. But attaining a sustainable recovery from the first-quarter trough will be a long haul.

 

Worsening performance of India Inc
 
India Inc. provides an early signal to the way the real sectors of the economy are functioning. The April-June 2020 results of about 1000-odd companies, which have declared their results so far, reveal the stress that they have gone through. Their sales plunged by 27 per cent, compared to an increase of about 10 per cent in the same period of 2019.
 
Profit erosion for this group of companies was sharper. Their profit before tax declined by 47 per cent, compared to a rise of 6 per cent and their net profit or profit after tax fell by a higher margin of 62 per cent, compared to a rise of 2 per cent in the first quarter of 2019-20.

 
These numbers do represent a serious deterioration in the performance of India’s corporate sector. But there is another way of looking at the same numbers.
 
The harsh reality is that India Inc.’s performance began deteriorating even before Covid-19. This became evident from its financial performance in the January-March 2020 quarter. In this period, sales of about 2,100-odd companies fell by six per cent, compared to a rise of 11 per cent in the January-March period of 2019. Pre-tax profit was down by 86 per cent, far worse than an increase of 36 per cent and net profit or post-tax profit was down by 88 per cent, compared to a 27 per cent increase in the January-March quarter of 2019.

 
Two points need to be noted. One, India Inc.’s performance in sales in the first quarter of 2020-21 has got worse not only on a year-on-year basis, but also sequentially compared to the previous quarter. Two, pre-tax profit as also net profit or post-tax profit in the April-June quarter of 2020, however, got slightly better both annually and sequentially, as the extent of decline in profit was lower. In other words, the profitability scenario of India Inc. has got less problematic, with a slowing down in the pace of deterioration.
 
Industrial output contraction severe
 
India’s industrial production in the first quarter of 2020-21 has fallen in each of its three months. Measured by the Index of Industrial Production (IIP), industrial output had begun contracting even before the start of the first quarter. In March, IIP fell by 16 per cent, after recording tepid growth of 2 per cent and 5 per cent in the previous two months of January and February, respectively.

 
The contraction was the most severe in April at a fall of 58 per cent. But it got better with every passing month—a fall of 34 percent in May and of 17 per cent in June. That meant the IIP fell by 36 per cent in the April-June quarter of 2020, compared to a growth rate of 3 per cent in the same quarter of 2019.
 
Manufacturing, which accounts for almost 77 per cent of the total IIP, took the biggest hit with a contraction of 67 per cent in April, 38 per cent in May and 17 per cent in June. The entire first quarter saw a decline in manufacturing of 41 per cent, compared to a 2.4 per cent increase in the same period of 2019.

 
What about indications for investment? The capital goods sector’s performance in the IIP provides a broad direction on how investment demand is faring and the trajectory in the capital goods sector output was similar. It fell by 93 in April, by 65 per cent in May and by 37 per cent in June. The first quarter of 2020-21 saw a contraction of 64 per cent, far worse than a decline of 3.5 percent in the same period of 2019-20. The absence of any recovery in investment demand is worrying for it will affect the chances of growth revival.
 

Indications of demand, however, seemed to offer some hope. Consumer non-durables recovered smartly in June with a growth rate of 14 per cent, the only sector that showed an increase in output in the entire IIP. From a contraction of 49 per cent in April and 11 per cent in May, the performance of the consumer non-durables in June showed a recovery and helped arrest the April-June 2020 quarter’s overall output contraction to only 15 per cent, compared to 7 per cent growth in the same quarter of 2019.
 
The IIP figures for the first quarter of 2020-21 show that the impact of Covid-19 and the lockdown on economic activity is reducing, but at a slow pace and the recovery to ensure an increase in output appears to be still a few months away.

 
Foreign trade presents a mixed picture
 
India’s merchandise exports performance fared poorly in the first four months of the 2020-21 year, even though the extent of the contraction in goods exported overseas declined with every passing month.
 
The trajectory in the contraction in exports in each of the four months of the current financial year is worth noting. A decline in exports by 60 per cent in April, by 36 per cent in May, 12 per cent in June and by 10 per cent in July. The impact of Covid-19 on the fall in exports is gradually becoming less severe. But there is no respite from a contraction as the July contraction represented the fifth consecutive month of a fall in India’s merchandise exports.

 
Imports in these months present a more worrying picture. The decline in each of the four months from April is steeper and the recovery is far less pronounced.
 
From a decline in imports by 59 per cent in April, imports fell by 51 per cent in May, 48 per cent in June and by 28 per cent in July. The divergent trends in exports and imports of goods are too obvious to miss. While the pace of decline in exports is getting arrested, imports contraction has continued to remain steady for the first three months of the financial year and has even reduced a bit in July.

 
Thus, while the exports performance indicate some recovery with as many as 16 out of the 30 major product groups recording growth in exports during July, the trend in imports indicate no such recovery in demand in the domestic economy. The shrinkage in trade deficit in the April-July 2020 period by over 76 per cent to $14 billion, compared to the same period of 2019, is no comfort. On the other hand, the tepid demand in the economy continues to remain a cause for concern.
 
Government finances under revenue pressure
 
The Union government’s fiscal deficit in the first quarter of 2020-21 increased much beyond the level presented in the Budget. A fiscal deficit of Rs 6.62 trillion in April-June 2020 was 53 per cent higher than what it was in the same quarter of 2019.

 
The higher deficit level was as much as 83 per cent of the Budget target. It looked a little better at 55 per cent, when compared with the enhanced deficit level that the government had planned for after it announced an increase in its borrowing level from Rs 7.9 trillion to Rs 12 trillion during the year. But the widening deficit was a cause for concern.
 
The first-quarter numbers on public finances also show how there has been a significant surge in the Centre’s capital expenditure. It went up by 40 per cent, even though the Budget had projected an annual increase of only 22 per cent.

 
Its revenue expenditure was reined in by keeping its growth at 10.5 per cent, lower than the Budgeted projection of 12 per cent. Of course, lower oil prices helped, as its subsidies bill declined significantly.
 
But the big challenge for government finances came from the revenue side. Its net revenue fell by 47 per cent, compared to a projection of a 20 per cent increase in the full year.
 
Even as the government may have succeeded in reining in its overall expenditure and budgeted for higher borrowings, its bigger concern would be on the revenue front. The fall is huge and there is no escape from a substantially higher fiscal deficit in the current year.

 
Unemployment data offers little relief
 
In the immediate aftermath of Covid-19 and the lockdown, unemployment in India, measured by the Centre of Monitoring Indian Economy (CMIE), spurted to 23.5 per cent in April 2020, from 8.75 per cent in the previous month. There was no improvement in the job situation in May, when unemployment stayed at the same elevated level of about 23.5 per cent, but made a smart recovery in June and July, when it dipped to about 11 per cent and 7.43 per cent, respectively. The July unemployment figure was even better than the February 2020 unemployment level of 7.76 per cent.

 
However, the rural-urban unemployment mix was deeply disturbing. Rural unemployment in this period of four months made a smart recovery from 22.9 per cent in April to 6.66 per cent in July, which was even better than the February rural unemployment level of 7.34 per cent. But the pace of improvement in urban unemployment situation was far less impressive—down from 25 per cent in April to 9 per cent in July. It was clear that the rural economy, helped by the kharif sowing season, had seen a smarter recovery, while urban unemployment was affected by job losses, particularly in the organised sector. Indeed, salaried job losses, which were estimated at 17.9 million in April, rose to 18.9 million in July.

 
The first half of August 2020 has brought no cheer to the job market either. The 30-day average of unemployment at the end of August 16 has risen to 8.14 per cent, reversing the trajectory seen in each of the previous three months of May, June and July. While urban unemployment at the end of August 16 was threatening to touch double digits, rural unemployment too had begun growing at 7.5 per cent.
 
The slowdown in the pace of unemployment, seen in the last two months, has been reversed, which does not augur well for the economy in the coming months.