HomeSpotlightRecovery is visible but some dark clouds are looming

Recovery is visible but some dark clouds are looming

It has been nearly 18 months since we have gone into a sort of hibernation. Though lockdowns have been relaxed and streets no longer give deserted looks, but we still live under the threat of pandemic. Now we are waiting for the third wave and in-fact, living in fear is worse than living under lockdown. The big question that’s making rounds in everyone’s mind is when the situation will get back to normalcy?

Numbers are encouraging

Yes, statistical figures encouraging and they point towards economic recovery. But we have gone through that kind of situation in March this year, only to go back into to shell because of the second wave. What’s encouraging is the fact that second wave was not (economically) as devastating as the first wave. But fear is still there and that’s hindering the return of normal life.

GDP growth on expected lines

In year-on-year (YoY) terms, Indian GDP expanded by 20.1% in Q1 FY2022, a superior performance compared to various large economies. But its also true that last year’s GDP growth was badly affected by stringent nationwide lockdown in India and comparison between two period will give distorted picture. A more appropriate picture of the real recovery can be gauged by comparing with a pre-Covid figures, i.e., comparing Q1 FY2022 with the Q1 FY2020. Such comparison shows that India’s GDP was 9.2% lower than pre-Covid levels in Q1 FY2022.

Some sectors worst affected

The impact of the second wave was most pronounced for THTCS (Trade, Hotels, Transport, Communication and Services), reflecting the weak demand for contact-intensive services, and construction, with declines of 30.2% and 14.9%, respectively, in GVA in Q1 FY2022 relative to the pre-Covid level. These are the sectors that provide maximum employment and therefore, their revival is crucial for the consumption led recovery.

Investment climate is not clear yet

Investment plans were put on hold by the private sector amidst the second wave, even though Government capex put up a healthier performance.  Since then though some of the industrial houses have reopened the investment gates, complete normalcy in investment climate is expected only in the next financial year. By then most of the population would have vaccinated and the impact of third wave too would become clear by then. Meanwhile, India’s top 21 states – accounting for more than 90% of aggregate state capital expenditure – are aiming for an ambitious 36% rise in capital outlay this fiscal (to Rs 6 lakh crore) over revised estimates of fiscal 2021 (Rs 4.4 lakh crore). On the other hand, CRISIL feels the target is overambitious and expects 11-13% rise in capex this fiscal too (like last year), assuming that states spend 80-85% of the budgeted estimate.

Energy consumption expected to grow

However, one of the biggest positives will be energy consumption. Says Ankit Hakhu, Director, CRISIL Ratings, “Growth in power consumption this fiscal would be a break from the muted trend seen in the past two fiscals. It will ride on an expected recovery in industrial activity amid healthy GDP growth, forecast at 9.5% on-year. The on-year growth of over 5% or 75 BUs would have been higher by as much as 100 basis points (bps), but for the second wave that hit us in the first quarter of this fiscal.”

“The three factors of cyclical upswing, conducive policy impulses and an improving global backdrop are likely to align themselves to position India for a virtuous cycle of growth and investments in the medium-term,” said Kumar Mangalam Birla, Chairman, UltraTech Cement Ltd recently while addressing the shareholders in the AGM. Incidentally the Company has announced growth plans of 19.8 Million MT with an investment of Rs 6,500 crores.

Real Estate recovery crucial

According to Amit Syngle, MD & CEO, Asian Paints, “the demand outlook is quite positive; with the second wave kind of abetting.. yes, some regions like Maharashtra and Kerala and parts of Northeast are still a little bit of a worry, we have a Delta variant kind of coming, but I think the vaccination drive is picking up and what we see is very positive environment.” On the other hand, Bharat Puri, MD, Pidilite Industries pins his hopes on the revival of real estate industry when he says “We are also quite optimistic about real estate now reviving because, as you know, real estate has suffered not only during COVID, but even before COVID. There is no doubt about the fact that when we speak to a lot of our key customers, they have seen a lot of inventory liquidation of their existing projects.”

Despite the positive comments from industry veterans, it may not be a smooth sailing for the economy in the coming months as some dark clouds are looming over the horizon. For example, containership freight spot prices have risen by 5% in August and congestion in ports, due to fall in global schedule reliability and shipping delays have also worsened. September-November being the strongest period for global exports, congestion is likely to intensify further, and rates may rise higher. This can meaningfully affect growth as well as inflation in the near term.

Fortunately, India is not as much dependent on exports as other emerging markets and expected strong growth in domestic demand may help the GDP to grow in the coming quarters. Also vaccination drive is in full flow which may help to contain the effects of pandemic spread at least for next six months. Reasonably good Monsoon may also help the farm income to grow in turn helping the rural demand to sustain at higher levels. All these factors go on to indicate that the second half of the year would be better than the first one.

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