India’s high-frequency indicators are displaying diverging trends, a trend that may persist for a while as the road to recovery remains an uncertain and bumpy one. While most indicators—including PMIs, mobility indices, power generation, core industrial output, segments of automobile sales—have recorded notable upticks from the mid-summer nadir, almost all of them are still at markedly weak levels.
Accordingly, even the Reserve Bank of India (RBI) acknowledges further downside risks to their expectation of an unprecedented 9.5 percent contraction in GDP in FY 20-21.
Recovery optics to be interpreted carefully
Growth prints in the subsequent year is expected to be significantly stronger. However, a number of factors cannot be overlooked.
First, the optics of recovery (eg., the GDP growth forecasts) in FY21-22 can be over-optimistic and misleading reflecting large favourable base effects. For instance, even after penciling in high single-digit growth, our current estimate for FY 21-22 GDP is about 12 percent lower than our pre-COVID estimates.
Second, of the four fundamental drivers of growth, prospects of recovery hinge critically on upticks in private consumption (C) and government spending (G) as uncertainties galore around prospects of investments (I) and net exports (NX).
Unprecedented fragility in urban consumer confidence
As widely appreciated, private consumption—with its near two-third share in GDP and typically with a higher-mid single-digit growth rate, is the key for India’s growth resilience.
However, consumer confidence has clearly been on a weakening track—the RBI’s consumer confidence index (CCI), based on a survey across 13 major cities, dropped almost monotonically from 104.6 in March 2019 to 85.6 in March 2020.
With the break-out of Covid and the imposition of stringent lockdown measures in early-summer, CCI fell further to 63.7 by May 2020. However, it is noteworthy that the index continued to fall to 53.6 and 49.4 in July and September 2020, respectively, even if the lockdown measures were gradually eased.
Thus, the weakness in consumer confidence may be more deep-rooted and may not disappear in a hurry even if the intensity of
COVID-19 starts easing in the coming months.
The weakness in the confidence of urban consumers is widespread as suggest the various sub-indices of the survey. Notably, the reading (net response) for the employment scenario was at an all-time low of -71.6 in September as against -30.5 and +3.9, respectively, six months and 18 months back.
The reading averaged nearly a staggering -50 during 2020 as against an average of around -10 during 12 months after
demonetisation. This is in contrast to the employment survey by certain private agencies that suggest that after a sharp spike during April-May, unemployment in India has corrected to its long-term trend.
Unsurprisingly, this has caused a major dent in the spending of urban consumers not only currently, but potentially also in the near future, especially in the case of discretionary spending.
For instance, on an average, nearly 72 percent of urban consumers indicated of late that they will not increase their discretionary spending even one year later as against a count of about 42 percent consumers saying so following demonetisation.
Resilience in rural activities
In contrast, rural demand remains more resilient. Our on-ground experience suggests that small businesses in rural areas, that typically depend only on the local supply chain and cater to demands for essential goods and services, bounced back better as soon as the “unlocking” process began in June-July.
With effective policy support, the rural economy can play a key role in strengthening the recovery in the coming months. Over the medium term also, focusing on rural infrastructure such as irrigation, agricultural storage and marketing infrastructure can make a meaningful virtuous cycle for the rural economy.
Targeted policy support to make a major difference
Against that challenging macro backdrop, support from both monetary and fiscal policies remain critical. Indeed, monetary policy reacted with commendable swiftness with large rate cuts and a heavy dose of unconventional policy support as the pandemic broke out.
At the moment, uncertainties prevail as a markedly dovish
October MPC statement was followed by a shockingly high CPI print. However, our assessment of the evolving growth-inflation dynamics clearly suggests room for further rate easing by Q4 FY20-21 as we continue to expect a turn in the inflation trajectory by then.
On the fiscal front, various announcements by the government triggered intermittent spells of cheer for industry and financial markets.
However, further heavy lifting by fiscal authorities is critical for a recovery in the coming months. It is also important that any near-term fiscal support should not crowd out the government’s capital expenditure, as that would mean a dent for long-term growth potential.
Given the limited fiscal space, the success of further fiscal spending, thus, lies in ensuring bang for the buck—or strong return—for every penny spent.
Providing timely support for the bottom end of the socio-economic pyramid— such as for MSMEs, affordable housing, micro-enterprises—can be a key step towards ensuring that. Policy initiatives in this regard had been promising.
Further initiatives may include a stronger focus on providing targeted liquidity, and better ease of business for these areas. While these segments faced major shocks during the lockdown, they clearly have the potential to make a meaningful contribution in the current recovery process, apart from providing much-needed employment and income support for the bottom end of the socio-economic pyramid, and thereby reducing the need for continued financial support for these segments.
—Siddhartha Sanyal is Chief Economist & Head of Research in Bandhan Bank. The views expressed are personal