Recently announced GDP figures have thrown some surprises giving fresh hopes of quick recovery of the economy which is undergoing lockdown 2.0 due to second wave of Covid-19. Though the first wave and the last year’s lockdown have broken the unhindered growth record since 90s the rate of contraction at 7.3% is much less than most of the economists had predicted. In other words, quick recovery has been able to restrict the damage to the economy. Recent GDP figures reflect a broad-based improvement across sectors, led by domestic demand and higher government spending on the demand side, and faster growth in services (especially construction) on the supply side.
Bad but manageable
Though the current situation is bad but manageable if the lockdown is not prolonged too far. Its true that last year’s recovery was uneven and second wave has further pushed back its broadening. However, exports and easy financial conditions should limit the downside.
Electricity consumption is growth at -9% on 2-year CAGR basis/-4% YoY, as unseasonal rains in West / North partly contributed to decline. e-way bill generation pace was -3% WoW, slowing its decline pace, but at -49% vs. March 2021 peak which shows that activity has slowed significantly. Meanwhile, e-toll transactions increased 4% WoW, first rise in 6 weeks. The card spends (debt + credit, POS + online) were +12% WoW, and are running -35% against March peak.
Industry is not worried much
Industry too is not much worried about the future prospects once the lockdown rules are relaxed. They bank on the last year’s experience when the demand recovery was sharp and fast. They believe this time too it won’t be much different and hope to see demand coming back once the lockdown is lifted. For example, cement and wood panel industry is keeping the production at normal level to take advantage of the rush of demand once the lockdown is lifted.
“Demand-wise discretionary spending has taken a back seat. Departmental stores, pharmacies etc, these categories continue to be robust. However, that the situation is “not as bad as the first quarter of last year. I feel the situation will not improve very rapidly from July. Green shoots will be there from June,” says Rama Mohan Rao Amara, CEO, SBI Cards.
According to MK Surana, CMD, HPCL “we have seen the petrol consumption is almost 20% higher as compared to May 2020. Similarly, diesel consumption is around 6-6.50%. But if compared with May 2019 – because May 2020 was a complete lockdown period – then petrol and diesel consumption are around 30% low. Going forward, there will be an improvement in demand.”
Q1 likely to be a washout
Nevertheless, Q1 of FY22 is likely to be a washout thanks to nationwide lockdowns announced by local governments. It may still report a strong growth YoY basis as the same quarter last year was even worse as the economy had contracted by 23.9% due to complete lockdown. This is likely to weigh on economic recovery, especially for MSMEs which did not see much recovery even in the first unlocking. However, exports may come to our rescue given the relatively better global economic recovery though it may not be able to compensate fully the loss which we may suffer on the domestic front. Apart from this, easy financial conditions should help protect the downside, to some extent. However, an aggressive fiscal consolidation poses risk to economic recovery, especially given the distress in the informal sector (where fiscal policy is more effective). Pace and scale of vaccination will also be a vital variable especially in view of several experts warning about the possible third wave.
According to CRISIL “The intensity of the second wave of Covid-19 infections in India has come as a surprise, and is haemorrhaging the country’s healthcare infrastructure. That has made lockdowns and restrictions inevitable. Dispersion of cases across states now mirrors the September 2020 peak. Worryingly, the number of cases has exceeded the peak by over 3x, highlighting the increased burden on healthcare services.” However, on the positive side, lockdowns are less restrictive for economic activity, and are concentrated in the most-hit states; agriculture, construction, manufacturing, and other essential activities permitted to continue.
Unlocking may be staggered and uneven
The asynchronous state-wide unlocking process will make the unwinding in restrictions more staggered and less predictable. Clearly, factors such as better adapted firms and policy response, stable financial conditions and robust global growth spill overs create growth buffers back home. However, a credible vaccine drive is vital. The faster the vaccination gains traction, the faster the delinking between mobility and virus proliferation happen.
Going by the current trend fiscal 2022 may be the repetition of what we saw last year. Just like last year, first half might be spent on fighting the second wave while the second half may see the economic recovery which will largely depend upon the extent of spread and the pace at which it will be contained. However, unlike last yea, this year the main driver of growth may be exports instead of rural India. With active cases coming down and daily vaccinations expecting to increase beyond 40 lakh doses, lockdown restrictions will ease off reinstating normalcy in the economy. FY22 could therefore still clock real GDP growth close to 10%.