Economy headed for recovery: Linked to vaccination

Story by  ATV | Posted by  AVT • 3 Years ago
Poster on Corona vaccination in a Delhi street
Poster on Corona vaccination in a Delhi street

 

 Sushma RamachandranSushma Ramachandran

The annual accounting exercise of the government – the budget - is expected to be an unusual one because it is being presented in the backdrop of a global pandemic. The COVID virus has created havoc throughout the world and affected the livelihoods of millions of people. India has been one of the hardest-hit with the economy expected to contract by about 8 to 10 per cent during the 2020-21 financial year. Even this level of contraction is considered good news, given that growth had crashed by 23.9 per cent during the first three months of the current fiscal (April to July 2020-21). As a result, the Finance Minister will have to grapple with the need to revive key segments of the economy including small and medium enterprises, the services sector especially the hospitality industry and also try to boost infrastructure growth and revive demand.

One needs to examine the state of the economy right now to get a better perspective of the scenario within which Ms. Nirmala Sitharaman will be formulating the budget proposals for 2021-22.  On the plus side, the new year has begun with green shoots of recovery rising faster than had been expected previously.  Much will depend, however, on the progress of the vaccination drive. If that is successful and it is possible to achieve herd immunity, the economy will likely float back to normalcy quicker than ever. Sadly, the drive seems to have run into hiccups related to vaccine hesitancy. Any doubts in the minds of even frontline healthcare workers need to be dispelled urgently otherwise the entire vaccination process could slow down. And that would be detrimental not just for the health of the general public but also for health of the economy.

As of now, fortunately, many key economic indicators are looking up. On the trade side, for instance, imports have begun to climb after many months of a steady fall. This is a clear sign that industrial activity is picking up. There is also a glimmer of hope on the export front as the decline is only 0.8 per cent in December and some commodities like oilmeal, iron ore and pharmaceuticals have risen significantly. What is even more significant is that Goods and Service Tax (GST) collections have reached above pre-COVID levels in December 2020. These touched Rs. 1.15 lakh crore, an increase of 11.6 per cent, making it the highest since the GST regime was launched in 2017.

The IHS Markit Purchasing Managers Index has also been positive for the fifth consecutive month, giving an indication that factory activity is picking up in December. This index is an indicator of the economic health of the manufacturing sector and is based an assessment of new orders, inventory levels, production, supplier deliveries and employment environment.

Another unique phenomenon has been the persistent buoyancy in equity markets. These have been bullish ever since May last year despite the economic collapse following the lockdown. This is in line with global equity markets which have shown a similar trend.  One factor behind the sustained rally has been the entry of a new class of youthful investors, who moved from other asset classes like bank deposits or real estate owing to poor returns after the onset of the pandemic. The other and more significant factor, has been the continuing presence of foreign institutional investors in Indian markets. This is partly due to global liquidity following stimulus measures announced in developed countries and also to projections that India’s economy will recover sharply in the next two years.

The sustained progress of the farm sector must be mentioned as despite the agitation of northern region farmers at the gates of the capital, it continues to show steady growth. Agricultural output had been the only positive area even during the April- June quarter in 2020. The year is expected to end with farm output rising at about 3.4 per cent.

There is still a long way to go, however, before there can be a full economic recovery. The eight core sector industries continue to show a decline in growth.  The core sector dipped by 2.6 per cent in November, bringing the overall fall in the first eight months of the current fiscal to 11.4 per cent. The performance of the core sector industries will ultimately have an impact on the overall index of industrial production.

Jobs equally continue to be an area of worry as unemployment has risen to 6.5 per cent in November according to the Centre for Monitoring Indian Economy (CMIE). It also found that high quality jobs have been more affected than others. The services sector is similarly facing serious difficulties and will continue to do so as long as the normal activities of travel, tourism and restaurants remain constrained by the pandemic. Here too much of the revival is going to be linked to a successful vaccination drive.

Inflation remains a bugbear over the past few months, partly due to food prices but also due to higher taxes on fuel and world oil prices having gone up. The other worrisome issue is that direct tax revenues have fallen mainly due to decline in corporate taxes.

The revival is thus bound to be uneven for quite some time though rail freight operations, petroleum and power consumption are now coming back to pre-Covid levels. Green shoots are thus clearly visible in many sectors even though last year’s stimulus measures had been conservative compared to those of other countries. One can now look forward with greater confidence to a V shaped economic recovery. With this outlook on the horizon and Covid cases on the decline as well as a vaccination programme under way, the government is in a better position to formulate a budget that should provide some relief to the common man.