The hard lockdown quarter

THE QUARTER ended June was so bad that about 25 per cent of the economic activity that existed a year was shaved off, analysts say. While it is certain that reopening of businesses will help improve economic activity, it is key to not lose sight of the pain points, and spot the early signs on the recovery track.

The Covid-induced contraction came at a difficult time: Only 68 per cent of manufacturing capacity was under use in December 2019, and a 5 per cent contraction in investments in the second half of FY20 followed. The extent of stress sectors driving investment was huge (chart 1), finds SBI Research.

Analysts say the investments will pick up only in FY22. But the stock market started looking up from its multi-year low at the turn of the fiscal year. Nifty50 has gained 25 per cent in the past quarter, but the stocks are priced way higher than before (chart 2). Much of this recovery has to do with the relaxation in lockdowns, which has instilled hopes in the markets. Foreign investors are looking again towards Indian markets, after a massive flight in March, though debt flows are yet to pick up (chart 3). Equity mutual funds are seeing strong inflows, but flows in debt funds are still subdued (chart 4).

While markets are hopeful, the government’s income, which reflects the real economy, is in a bad shape. GST revenues indicate consumption, and they are 40 per cent down in the June quarter. So is the gross tax revenue that includes income and corporate taxes (chart 5). Demand for power and fuel is on the rise, courtesy some recovery in economic activity (chart 6, 7). Loss in trade is yet to recover (chart 8), but more importantly, it also underlines demand side weakness in the Indian economy.