Economy slowly returning to pre-covid level, at best

While several parameters of the Indian economy are slowly returning to pre-pandemic levels, the economy would eventually be at best back to where it was two years ago, say economists.

Gross domestic product at constant prices during the first quarter of the current financial year was still 9.2 per cent lower than in the same quarter of 2019-20, a pre-covid period. But economists expect GDP to hit the pre-pandemic level by the third quarter.

Some indications to these expectations were given by the high-frequency lead numbers. For instance, this July, the index of industrial production (IIP) was just 0.3 per cent away from what it was in the same month the previous financial year. Within IIP, the manufacturing index in July 2021 was nearly as high as the October 2020 level during last year’s festive season, which gives a glimpse into the strength of the revival after the second Covid wave, says Aditi Nayar, chief economist at Icra.

The manufacturing index in July 2021, at 130.9, was nearly as high as October 2020 (132.0) during last year’s festive season, indicating the strength of the revival after the second wave. IIP is a volume-based index, while industry in GDP is value-added. So these numbers may not necessarily match. For instance, dispatch of Maruti S-presso and and Maruti Vitara Brezza would add the same number of points in IIP, but are valued differently in GDP calculations.

Yuvika Singhal, economist at Quanteco Research, forecasts that GDP will broadly be back to pre-pandemic level by the third quarter of the current financial year. “Most indicators will be mean reverting, but there will be divergences. Manufacturing per se (would be) better than services, nondurables better than consumer durables, large corporations better than MSMES and so on,” she says.

It is a bit intriguing as to why, then, IHS Markit purchasing managers’ index (PMI) was 52.3 and PMI services 56.7 in August. A likely explanation is that PMI is month-on-month, estimated from surveys of the private sector. While the base of the previous month in the case of manufacturing was 55.3, it was 45.4 for services. A reading below 50 indicates contraction, while a number over that mark signifies expansion. So, while the opening up of various services such as restaurants gave PMI a boost in August, this wasn’t the case in manufacturing.

Among the other parameters, exports continued to be higher than pre-covid levels. While they were up nearly 50 per cent in July year-on-year, the growth slowed down a bit at about 46 per cent in August. Exports continued to be higher than pre-covid levels in each of the five months in the current financial year.

One may argue that this was mainly due to external demand. But non-oil, non-gold imports, which give an indication of domestic demand, were up 4.32 per cent this August over the same month in 2019. They were just 1.15 per cent up in July over the same month of 2019.

Also, taxes continued to be higher than pre-covid levels in each of the first five months of FY22. This may also be due to better administration as there is better data sharing between the Central Board of Direct Taxes and Central Board of Indirect taxes and Customs and mandatory use of e-invoicing in GST.

Ranen Banerjee, leader, economic advisory services, PWC India, says the economy is clearly coming to pre-covid levels. “We need to be aware that the national income of about two years has been lost to Covid and that will have an impact on the aggregate demand. The economy was slowing down precovid, too, and so coming back to pre-covid levels is not good enough for India,” he says.

He points out that the economy needs further growth momentum and to sustain it over the pre-covid levels. “A coordinated support from monetary and fiscal policy is imperative, with fiscal policy carrying a disproportionate burden to provide the necessary priming before the private sector steps in,” he says.

Some recent policy announcements related to the bad bank, retrospective taxation, relief to telecom companies and productivity-linked incentive (PLI) schemes are great steps by the government, he says, but adds these are smart boosters that do not have an immediate fiscal impact.

Nayar of Icra says even as economic activity is continuing to recover ahead of the festive season, the low rainfall in August, followed by heavy precipitation in September, is likely to distort trends in sectors such as mining, electricity and construction, even as supply-side issues related to semiconductors are constraining output in the auto sector.

Goods movement by trains were higher in each of the first five months in the current financial year than the precovid levels. It was anyway quite higher year-on-year, though the pace of growth is slipping in each of the first five months than the previous month. This could be because of a low base effect in the previous financial year, which was the least in April and gradually increased as lockdowns were eased.