Babus fear protracted economic slowdown
Uptick in activity may not be as large as believed
The number of laid-off workers seeking US unemployment benefits rose to 1.1 million last week after two weeks of declines, evidence that many employers are still slashing jobs as the coronavirus bedevils the US economy. The latest figures, released on Thursday by the Labor Department, suggest that more than five months after the viral outbreak erupted the economy is still weak, despite recent gains as some businesses reopen.
India is staring at a protracted slowdown as coronavirus cases reach its countryside, with signs of recovery in the rural economy hailed by Prime Minister Narendra Modi "at best a mitigating factor", government officials and analysts said.
The world's No.5 economy reports first-quarter GDP data on August 31 and, according to a Reuters poll, it is likely to have contracted 20 per cent over April-June. It is forecast to shrink 5.1 per cent in the year to March 2021, the weakest since 1979.
Nearly half of the country's 1.38 billion population rely on agriculture to survive, with the sector accounting for 15 per cent of the economic output.
Modi has been citing higher fertiliser demand and sowing of monsoon crops, both key signs of rural activity, to show there are "green shoots" in the economy.
But four government officials said the uptick in activity may not be as large as believed given a spike in virus cases in rural areas that were initially isolated from the pandemic.
"The economic situation has in fact worsened since April and May, and we are likely moving towards a longer economic slowdown than earlier expected," said a finance ministry official.
The official pointed to sluggish consumer demand and a slowdown in rural lending as causes for concern.
"The situation on the economy front is very serious and the government's hands are tied on the fiscal front," a government adviser with direct knowledge of the budget plans said.
Both declined to be named. A ministry spokesman declined to comment.
New virus cases emerging outside major cities, dashing hopes the rural economy will be a buffer against shrinking exports and manufacturing.
"While a recovery in rural activity provides a glimmer of hope, it is at best a mitigating factor," said Rahul Bajoria, a Barclays economist. Bajoria expects India's GDP to have contracted 22.2 per cent in the June quarter.
Farmers planted nearly 14 per cent more land between June 1 and July 31 than last year given good monsoon rains, while fertiliser production rose 4.2 per cent in June.
"Even as the momentum coming from the agriculture sector...is a positive, we believe this may not sustain due to surplus labour concerns, along with an increasing proportion of active Covid-19 cases," said Upasna Bhardwaj, economist at Kotak Mahindra Bank.
Icra believes pent-up demand contributed to some improvement in manufacturing in June and July, and that it may not continue in August due to lockdowns.
"Flattening of India's virus curve is critical for a pickup in production. Once the economy unlocks fully, we expect exports to lead to recovery and domestic demand to lag," said Kapil Gupta, chief economist, Edelweiss.