Patchy recovery

Recent data should be cautiously interpreted

All economic indicators are being keenly tracked by the government and the private sector to trace signs of a durable economic recovery in what is perhaps the most difficult and uncertain year in recent history. The latest reading of some of the economic indicators has raised hopes. The purchasing managers’ index for manufacturing, for instance, expanded at the fastest pace in over eight years in September. Goods and services tax (GST) collection went up by 4 per cent over the same period last year; exports also went up by 5.3 per cent during the month, and other indicators such as e-way bills and power consumption are also indicating a recovery in economic activity. However, these economic indicators should be cautiously interpreted.

While the economic activity is certainly improving from the lows witnessed during the near-complete shutdown of the economy, it still has a long way to go. Recovery in manufacturing could be due to the pent-up demand of the first quarter. GST collection may be looking good because of the filing for previous months. Thus, it will be important to see whether recovery is sustained in the coming months. Further, credit and investment demand still remains tepid. A number of areas in the services sector such as tourism and hospitality continue to suffer, and a revival will depend on containing the virus. While the infection curve is showing initial signs of flattening, the prevalence of the virus — and the possibility of a trend reversal — will continue to undermine activity in these sectors in the near term. Therefore, as Union Finance Minister Nirmala Sitharaman said in an interview to this newspaper last week, it is still a patchy revival.

The Indian economy contracted by about 24 per cent in the first quarter of the current fiscal year. The second quarter data will be better, but output is still likely to have contracted. The course of economic recovery would clearly depend on the Covid curve and the nature of policy support. The government has further eased restrictions, but the risk of infection will continue to affect business in a number of sectors. Perhaps a decisive drop in new infection in the coming weeks would boost confidence and help recovery. In terms of policy support, the government has said that it is open to giving a demand push at an appropriate time. It should perhaps start working in this direction as soon as possible and give that extra push which will help support recovery.

However, the government last week decided not to alter its borrowing programme, which suggests that both the amount and timing of another stimulus remain undecided. It would do well to gauge the kind of fiscal space that can be created and start deploying it at the earliest. This will help strengthen recovery. In the medium term, assuming the infection is contained meaningfully, recovery needs to be supported by a variety of policy interventions. For example, nonperforming assets in the banking system will go up and the government will need to make sure that the public-sector banks are adequately capitalised. Further, the debt restructuring scheme should be implemented swiftly and transparently. The government has implemented important structural reforms in recent weeks and it should continue to improve the business environment. The virus, however, remains the biggest risk to recovery.