Covid-19: The economy is recovering but will have to deal with inequality - Hindustan Times
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Covid-19: The economy is recovering but will have to deal with inequality

Jul 23, 2021 01:56 PM IST

While lockdowns per se might not be a threat anymore — unless there is a third wave — the economy might still have to deal with significant post Covid-19 complications. Ignoring these issues can prove to be costly in the long-term

India’s macro-economic prospects look far better now than they did just a few months ago. Daily new cases of Covid-19 continue to fall, despite a sharp rise in mobility and business resumption indices. International petroleum prices have fallen significantly during the course of this month. An Organisation of the Petroleum Exporting Countries (OPEC) deal to gradually increase production might have significantly reduced the threat of any reversal in this trend. The south-west monsoon has revived itself after a brief but concerning period of dry spell, bringing good news for agricultural production.

Representational image. (Shutterstock) PREMIUM
Representational image. (Shutterstock)

These are all favourable developments for the economy. But do they mean that the economy is finally shedding the effects of the pandemic’s disruption? While lockdowns per se might not be a threat anymore — unless there is a third wave — the patient (economy) might still have to deal with significant post Covid-19 complications. Ignoring these issues can prove to be costly in the long-term.

First the good news...

The Nomura India Business Resumption Index (NIBRI) reached 96.4 in the week ending July 18. A NIBRI value of 100 indicates pre-pandemic levels of economic activity. The latest value of NIBRI is the highest since the February 28 value of 98.1, and it underscores the V-shaped recovery in economic activity after the second wave peaked.

Also Read | Inflation targeting and the Indian economy

Numbers speak for themselves. The lowest value of NIBRI during the second wave was 60.3 on May 23, 2021. This is comparable to the NIBRI value of 61 in the week ending June 7, 2020. While NIBRI has gained 36.1 points in the eight weeks since May 23, 2021, it gained only 9.3 weeks in the eight weeks after June 7, 2020.

Also, daily new cases were increasing, not decreasing in 2020. Unless there is a third wave, the economic prospects for the quarter ending September 2021 look good at the moment. A revival in monsoon rainfall after a dry spell is expected to generate tailwinds for the farm sector.


… even on the oil front

Petrol, diesel prices have not increased for seven and nine consecutive days respectively as of July 23. This is the longest spell on petroleum prices not rising since May 3, after the freeze on prices coinciding with the state election cycle was removed. While prices are still at record levels, the fact that they have not risen is definitely good news.

This period of stability in oil prices has come after OPEC reached a deal to increase oil production by 400,000 barrels per day until the pre-pandemic levels are restored.

To be sure, crude oil prices did recover some of their losses on July 21. “Crude slumped on Monday in tandem with broader financial markets on fears that the spread of the coronavirus’ delta variant would inflict a fresh blow on the global economy...Since then, the market has been on the mend as traders anticipate that OPEC+’s scheduled output increases aren’t large enough to avert a shortfall in coming months. Sentiment has been boosted as U.S. government data showed oil inventories at the nation’s key storage hub in Cushing, Oklahoma, falling to the lowest since January 2020”, a Bloomberg story said.

The OPEC deal raised hopes that crude oil prices will not increase significantly, even if they do not come down in the near future. It remains to be seen whether crude prices stabilise at the current levels or not. Any significant relief in prices will of course require a reduction in taxes on petrol-diesel.


But bigger firms are growing at the cost of smaller ones

An analysis published on July 21 in the Business Standard newspaper has pointed towards rising market concentration in key sectors of the economy in the pandemic year. The analysis has looked at Herfindahl-Hirschman Index (HHI) for sectors such as steel, cement, telecom, aviation and tyres to show a rise in market share in 2020-21. HHI is the sum of squares of the market share (in whole numbers) of firms in a particular industry. So, HHI will be 10000 in a monopoly and just 100 if 100 firms had a share of one each in a market.

A rise in HHI is not the only red flag towards rising market concentration in the Indian economy. A report dated July 15 by Pranjul Bahndari, chief India economist at HSBC Securities and Capital Markets also pointed towards this fact.

“We look closely at the constituent companies of the FTSE index, which by design, belong to the ‘formal sector’. We find that historically, nominal GDP growth has been a good indicator of the formal sector corporate sales. But during demonetization, and also the pandemic period, formal corporate sales overshot nominal GDP growth. We believe this means that some demand, which was previously catered to by the informal sector, began to be catered by the formal sector”, the report says.

The Indian economy started losing momentum after the back-to-back (formalisation) shocks of demonetisation and Goods and Services Tax rollout. The reasons for this are not very difficult to understand. The rich tend to save more of their additional incomes than the poor. When income distribution shifts away from the poor to the rich, consumption demand faces headwinds, which lead to a growth slowdown.


We will only have the GDP estimates for the quarter ending June 2021 in last week of August. There is a long time to go before arriving at any meaningful estimates of GDP growth in 2021-22. The inequality threat might not matter for GDP growth in the current quarter or even the current year. But, if not arrested with a policy intervention, it will definitely have an adverse impact on India’s long-term growth prospects.

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  • ABOUT THE AUTHOR
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    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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