Sushma Ramachandran

Global credit rating agencies are beginning to express concern over India’s growth prospects for 2021-22, even as other economic indicators are showing a downswing. With the second Covid wave overwhelming large parts of the country, it looks as if hopes of a sharp V-shaped recovery from last year’s contraction are slowly fading away. The U.S. based rating agency Moody’s has warned of a threat to recovery while the Japanese brokerage Nomura has tempered its growth expectations for this country for the current fiscal from 13.5 per cent to 12.6 per cent. Moody’s has retained its projection of 13.7 per cent but cautioned that the steps taken to contain the second wave pose a “credit-negative threat to economic recovery”.

On the positive side, the agency has argued that the absence of a national lockdown like last year and the focus on localized containment measures will reduce the impact on the economy. It pointed to other mitigating factors such as the progress on vaccinations which is now the fastest in the world as well as the relatively low death count as compared to other countries.

Nomura, on the other hand, has less confidence in the resilience of the economy and has reduced its projections for the current fiscal. 

British brokerage Barclays has also estimated that the localized lockdowns and mobility restrictions could lead to a decline in GDP growth, especially in the first quarter. In a recent report, it has retained its projection of 11 per cent growth for the current fiscal but cautioned against downside risks if the curbs are tightened further. It has also given the assessment that the number of new active cases are likely to stabilize by May as recoveries catch up.

Even as these agencies are apprehending a setback to growth, they continue to express confidence that India will grow at double-digit levels in the current fiscal. This is despite other signals being given about the sluggishness of the economy in the past few months. In regard to industrial output, for instance, it looks as if it may be difficult to have a positive outcome during the first quarter. The Index of Industrial Production (IIP) for February this year shows a contraction of 3.6 per cent, the second month of decline in a row. The IIP had fallen by 0.9 per cent in January. The dip in February is largely due to a fall of 3.7 per cent in the manufacturing segment, along with 5.5 per cent in mining. In addition, retail inflation is rising to 5.5 per cent though this still comes within the ceiling of six per cent advised by the Reserve Bank of India. Most of this increase is due to a 4.94 per cent increase in the basket of food products, an issue which is within the government’s capacity to resolve in the near term. 

The rating agencies, however, are basing their confidence on other indicators that continue to show the economy’s resilience despite the second wave of the virus. This includes GST (Goods and Services Tax) collections, which are now even higher than pre-pandemic levels. The collections for March this year touched a record high of over Rs. 1.23 lakh crore, a 27 per cent rise over the same month last year. In fact, this month recorded the highest GST revenues since the introduction of the new tax. 

One of the reasons given by the Finance Ministry for the spurt in collections has been a series of measures taken to ensure better tax realisation. This includes closer monitoring against fake billing, deep data analytics using data from multiple sources, and effective tax administration. With this effort, GST revenues have crossed the Rs. one lakh crore mark for a continuous period of six months. This is one indicator that has given greater confidence to external agencies that the economic recovery in the country is not just a flash in the pan.

Another critical signal of rising economic activity, power consumption, has also been rising in recent months. According to the latest official data, power consumption grew at 24.35 per cent in March over the same month last year, clearly showing a revival in economic activities. Peak power demand which is the highest supply in a day remained well above the peak level achieved in March last year. 

Similarly, railway freight movement rose by 24 per cent in March, yet another sign of a resurging economy. Rail freight revenues grew by 24 per cent, compared to the same period in 2020. Demand for petroleum products has also been rising in recent months.  Overall fuel consumption rose by 17.9 per cent in March this year to reach 18.8 million tonnes. This included a 27.4 per cent rise in petrol sales and a 27.6 per cent increase in diesel sales. Since diesel consumption is largely in the transport and agriculture sector, it shows that supply chains all over the country are returning to some semblance of normalcy. 

While these are highlights of an economic recovery, the fact is the situation is changing rapidly owing to the second wave of the Covid virus. With the stringent movement curbs now announced for Maharashtra, one of the country’s key industrial and commercial hubs will be crippled for the next few weeks. Restrictions have also been imposed in many other states including Delhi and Punjab, creating a difficult work environment for both industry and services. The outcome of this altered scenario will emerge over the next few months.

Only then will it be possible to gauge whether the curbs on economic activity imposed as a result of Covid have put the brakes on growth. Rating agencies are so far expecting that this will be a temporary setback and things may get back to normal by the end of May, as it is estimated that the peak of infections will be over by then. It may then be possible to get back to normal economic activity by June or July. These are, however, only projections for the time being. One can only hope these assessments turn out to be correct and the country manages to achieve double-digit growth in the current financial year.