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Saturday, May 30, 2020

Explained: How India is responding to lockdown relaxations

An HSBC report finds that economic disruption has come down but the lack of fiscal relief and a sharp increase in Covid cases pose significant threats to economic revival

Written by Udit Misra , Edited by Explained Desk | New Delhi | Updated: May 7, 2020 6:56:21 pm
Explained: How India is responding to lockdown relaxations Metro work restarts at Bundgarden road in Pune, on May 5, 2020. (Express Photo: Arul Horizon)

The gradual relaxation of the nationwide lockdown starting May 4 seems to have been a step towards resumption of normal economic activity. A new report by HSBC Global Research finds that only “40% of the economy will continue to remain disrupted (versus 65% and 50% in the first two phases of the lockdown, respectively)” thanks to the relaxations which divided the country into three different zones — red, orange and green.

As Table 1 shows, HSBC estimates 60% of the economy could gradually get back to work now.

Source: Media reports, CEIC, HSBC. Click to enlarge

Over the course of the last month, as the economy stalled by design, the PMI plummeted and unemployment shot up to nearly 30% (see Charts 1 & 2).

Explained: How India is responding to coronavirus lockdown relaxations Chart 1; Source: Markit, HSBC. Click to enlarge Explained: How India is responding to coronavirus lockdown relaxations Chart 2; Source: SMIE, HSBC. Data as of May 3, 2020

The PMI or the Purchasing Manager’s Index is a useful tool to understand whether businesses are doing better or worse over the last month. PMI typically surveys data on variables like overall production, new orders, inventory levels, supplier deliveries, and employment. So if overall production or new orders fall dramatically in any month, the PMI shows the decline.

But, according to HSBC, as things stand, “April may well be the trough”. That’s because there are signs of a pick up in the economy towards late April and especially early May.

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For instance, driving activity and electricity consumption are up.

Explained: How India is responding to coronavirus lockdown relaxations Chart 3; Source: Apple mobility trends, HSBC. Explained: How India is responding to coronavirus lockdown relaxations Chart 4; Source: POSOCO, HSBC

And so are the deposits in Jan Dhan accounts, possibly a reflection of the first fiscal relief package reaching the poor.

Explained: How India is responding to coronavirus lockdown relaxations Chart 5; Source: CEIC, HSBC. Data as of April 29, 2020

However, there are two caveats. One, much like these trends, the doubling rate of COVID-19 cases also picked up pace in early-May. (Read our explainer on why Covid cases are likely to see a sharp rise in the coming days)

Explained: How India is responding to coronavirus lockdown relaxations Chart 6; Source: CEIC, HSBC. Data as of May 5, 2020

Moreover, given the stress in the overall economy, it requires another round of fiscal boost. As the chart below shows, HSBC expects a fiscal relief package of the order of 5% of the GDP (India’s GDP was $2.8 trillion in 2019). Half of the additional 5% would have to come from a higher fiscal deficit of the central government. (Also read: Why the government’s Covid relief package should come sooner rather than later)

Explained: How India is responding to coronavirus lockdown relaxations Chart 7; Source: HSBC estimates

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