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How far will the second wave dent India’s economic recovery?

One big reason for that lies in the lockdown rules this year which allow greater relaxations for industrial activity and movement of goods than last year. Unlike last April, when large parts of Indian industry was forced to shut down because of a long nation-wide lockdown, this time has been different. State governments have taken the lead in imposing restrictions this time, and they seem to have learnt some lessons from the devastating lockdown of 2020. The impact of the second wave on industrial activities thus far remains small, a 26 April note by economists at ratings agency CRISIL Ltd said.

The fact that vaccines are available this time unlike last year provides another reason for hope. As vaccination opens up and vaccine availability improves in the coming months, it is expected to provide a shield against severe disease, if not infections .

Yet, as more and more local authorities impose lockdowns, mobility will take a hit, and high-contact sectors such as hospitality and tourism will be severely impacted. The urban informal sector could also be hit hard. While economic output is likely to be impacted in the April-June quarter, the medium term outlook appears stable, wrote economists at Nomura in a note to clients dated 27 April.

“Parts of the economy like manufacturing, agriculture, or work-from-home and online based services should be resilient… as the pace of vaccinations pick up (which we expect should be evident from June), there should be another return of pent-up demand, in addition to other tailwinds (strong global growth, lagged impact of easy financial conditions, and front loaded fiscal spending),” said the note by Nomura economists Sonal Varma and Aurodeep Nandi.

Recovery Interrupted

The latest monthly data for economic indicators, available as of March, suggests a healthy pace of economic recovery in the country. Seven of the 16 high-frequency indicators considered in Mint’s macro tracker were in red, or below their five-year average trend, in March, the best performance since April 2020. Five were in green, or above the average trend, while the rest were in line with it. In February, half the tracker had been in red.

Source: CMIE

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Source: CMIE

While the pace of economic recovery will likely slow down by the time the next edition of the tracker is published, the slowdown is likely to be less severe than last year. Mint’s macro tracker, launched in October 2018, saw its lowest point in April 2020 when almost all indicators turned red as economic activity came to a halt thanks to the world’s most stringent lockdown.

Since then there has been a slow recovery that has picked up some speed since late last year. Given the unusual contraction in most high-frequency indicators last year, it makes it difficult to assess year-on-year growth figures. To get a better pulse on the economic momentum in the country, the Mint macro tracker will consider the annualized growth over a two-year period (with 2019 as the base year) in all cases where the year-on-year growth was used previously. This also helps us side-step some of the contentious data from last year, such as that relating to inflation. Finally, to present a more real-time picture of labour market trends, a new indicator has been added to the tracker: the monthly labour force participation rate, as reported by the Centre for Monitoring Indian Economy (CMIE) based on its nationwide surveys.

Weak Spots

The latest edition shows that the consumer economy continues to be a weak spot, with only one indicator (tractor sales) in the green. One (vehicle sales) is flashing amber. The other two indicators remain in the red, despite some improvement. The producer economy fares a little better, with two of the four indicators in the green.

The external sector remains a mixed bag, with gradual growth in exports. March’s exports grew at an annualized pace of 2.6% compared to March 2019. However, in major labour-intensive sectors, such as gems and jewellery and leather products, the decline continued in March. Exports in these sectors declined at an annual pace of 1.3% since March 2019. This indicates that the stress in the labour market continues.

Other labour market indicators – the rural wage rate and the labour force participation rate – also suggest continuing stress in the labour market. Taken together with the weakness in consumer demand, this suggests that sustainable recovery in demand may still take time. After the shock of the second wave subsides, we may indeed see pent-up demand powering the economy for a while. But if labour market conditions remain weak, this will act as a drag on the economy over the medium term.

Persistent inflation is another threat, which can erode purchasing power of households, and make it difficult for the Reserve Bank of India (RBI) to continue its accommodative stance in the coming months. The resurgence in covid-19 infections, “if not contained in time, risks protracted restrictions and disruptions in supply chains with consequent inflationary pressures,” RBI’s latest monthly outlook report on the state of the economy said.

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