The Number Theory: State of economy amid Covid-19 surge
- Three charts that highlight the economic challenges of India’s second Covid-19 wave
India is currently experiencing a severe second wave of Covid-19 infections. With many states/cities reimposing lockdowns or lockdown like restrictions, economic activity is bound to suffer. That the second wave has almost coincided with the imposition of the first lockdown in terms of the time of the year implies that the economy’s performance might not be very impressive despite a favourable base effect on account of lockdown restrictions last year. Here are three charts that highlight the economic challenges of India’s second Covid-19 wave.
1) NIBRI suffered the sharpest fall in the first week of the new fiscal year
The Nomura India Business Resumption Index (NIBRI) suffered its sharpest week-on-week fall in the week ending April 4, dropping to 90.7 from last week’s value of 94.6. NIBRI reaching 100 will entail a return to pre-pandemic economic activity levels. It had almost reached that value in February, when it touched 99.3 in the week ending February 21. “Since it bottomed last April, NIBRI has risen every month, on average, but it declined for the first time this March (-2.8pp) and has already declined by much more in the first week of April (-4.5pp)”, a research note by Nomura economists Sonal Varma and Aurodeep Nandi said. “Given the continued rise in cases and the likelihood of more statewide restrictions, we expect softer sequential growth in Q1 FY22 but view the medium-term impact as limited,” the note added. With new cases rising continuously across regions, NIBRI might continue its downward trend. To be sure, NIBRI values are almost twice compared to what they were at this time last year, given the complete lockdown that was in place back then.
2) The second wave has come at a time when sequential recovery was losing momentum
Even without the second wave, India’s post-pandemic economic revival trajectory created a division among economists. Most institutional and private forecasts have been doing an upward revision of India’s 2021-22 growth projections. The IMF’s latest World Economic Outlook report upgraded India’s 2021-22 GDP growth forecast from 11.5% to 12.5%. However, most high-frequency indicators have been showing that the sequential economic recovery has been losing momentum. This was seen in a sharp contraction of 4.6% in the index of eight core sector industries in the month of February. This index comprises of around 40% of the Index of Industrial Production (IIP) basket. The March Purchasing Managers Index (PMI) numbers fell for both manufacturing and services. While both PMI manufacturing and services are still above the critical threshold of 50, it indicates expansion in economic activity compared to last month; PMI manufacturing suffered its second-biggest month-on-month fall in March since May 2020. What makes matters worse is the fact that PMI being an expansion zone has not helped employment levels. “Aggregate employment decreased further, marking a 13-month sequence of job shedding. Moderate declines were evident at manufacturing firms and their services counterparts,” a press release from IHS-Markit, the agency which conducts PMI surveys in India, said.
3) Consumer confidence deteriorates further
One of the biggest debates around the post-pandemic economic recovery has been its class-aspect. Many independent economists have termed it a profit-led rather than a wage-led recovery. This has direct consequences for the economy as private consumption accounts for more than half of India’s GDP and if incomes do not go up for the majority, growth is bound to take a hit. While indicators such as NIBRI, PMI, etc., have shown remarkable improvement after the lockdown restrictions were removed last year, consumer confidence continues to remain at abysmal levels. The latest round of RBI’s Consumer Confidence Survey, which is conducted in 13 major Indian cities, dived further south in March in a break from the improvement it had shown in the November 2020 and January 2021 rounds. With new infections rising, restrictions being reimposed and widespread fears of another national lockdown, as captured by workers fleeing big cities, consumer confidence could drop further in the next CCS round.
The critical difference between the first and second wave of Covid-19 infections in India is that we have vaccines now, which were not there during the first wave. It is therefore not surprising that expediting and expanding vaccinations and not a fiscal or monetary stimulus are at the centre of strategising against the second wave. However, this does not mean that the economic factors will not matter. The RBI’s Monetary Policy Committee (MPC), in its first meeting in the new fiscal year, decided to keep policy rates unchanged for the fifth time and retain its accommodative stance.
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“As corporates pass on higher commodity prices to consumers (in 1HFY22) and pent-up services demand stokes services inflation (in 2H), core inflation could begin to rise. We are already seeing some nascent pressures building up on this front. And the 3-month and 1-year household inflation expectations have risen by 80bps and 10bps respectively in the March 2021 round. We forecast core inflation at an elevated 5.5-6% range in FY22, and worry that it tends to remain sticky in India,” said a research note by Pranjul Bhandari and Aayushi Chaudhary, economists at HSBC Securities and Capital Markets India Private Ltd.
“Elevated inflation and negative real rates can create their own distortions such as encouraging investment in physical assets such as gold, which in turn can pressure external balances (via high gold imports) and lower potential growth (via lower financial savings). We believe the RBI is cognizant of these factors, and will embark on a gradual exit from loose monetary policy as the current pandemic wave subsides and the vaccination drive reaches critical mass towards end-2021. We expect it to move to a neutral stance, start using liquidity switching and sterilised intervention tools more actively, and begin raising the reverse repo rate around then. However, we are not forecasting any repo rate hikes over the foreseeable future,” Bhandari and Chaudhary added.