Current state of Indian economy: The good, the bad and the ugly
High frequency indicators suggest that August was the best month for the economy since the imposition of a nation-wide lockdown on March 25. However, these trends should be seen as a sequential improvement rather than a return to pre-pandemic levels of economic activity. The ongoing recovery continues to face at least two risks: growing infections across the country and rising stress in state finances.
Good news: Sequential recovery picks up
Purchasing Managers’ Index (PMI) for manufacturing was recorded at 52 in the month of August. A PMI value above 50 signifies expansion of economic activity. PMI (manufacturing) was in contraction zone between April and July. Maruti Suzuki, India’s largest car maker sold 21.7% more cars in August 2020 than it did in the same month last year. To be sure, these numbers are dispatches to dealers and not retail sales. However, these numbers do suggest that consumer demand is picking up with easing of lockdown restrictions.
Bad news: Economy still far from pre-pandemic levels
The sequential recovery should not create an illusion that the economy has recovered from Covid-19’s disruption. The Nomura India Business Resumption Index (NIBRI) was reported at 75.7 in the week ending August 30. This is better than what it was earlier; but the latest values are 24 percentage points less than pre-pandemic levels compared to a 31 percentage point deficit in July. The report notes that “the recovery is uneven and the recurring weakness in the labour market highlights the fragility of household demand”. It also attributes some of the recovery to post-lockdown pent-up demand.
Ugly part: Growing squeeze on state finances
There is growing consensus that a fiscal stimulus is indispensable for an economic recovery. Gross Value Added (GVA) numbers released on Monday show a contraction in the public administration, defence and other services sub-sector. Central Government Account (CGA) numbers from the ministry of finance show that the centre has spent more on both revenue and capital expenditure heads between April and July than it did last year. This means that the fall in spending must have come from the states. Things could become worse, given the growing crisis in state finances. The states will face a shortfall of Rs 2.35 lakh crore in GST compensation cess payments. They will also suffer because of a shortfall in other central taxes. The centre has mostly kept the windfall tax gains from lower crude prices to itself. A resource crunch for the states will lead to a double whammy -- a pro-cyclical reduction in government spending and a lowering of guard in fighting the pandemic. India can’t afford either.