Though Robert Frost was better known as a poet than an economist, his iconic metaphor of two roads diverging in a wood is of particular significance in the post-lockdown transition of economies. The road “less travelled by” is when lockdown relaxations lead to higher mobility (and economic recovery), and the pandemic curve remains under control. The more common, “sub-optimal” road is one where lockdown relaxations lead to both mobility and COVID-19 cases rising as people return to work. In this scenario, lives remain at risk, but livelihoods also gradually recover.
There is, however, also a darker third road — one where lockdown easing leads to such a high spurt in COVID-19 cases that eventually the fear factor takes over both local governments and people, leading to reduced mobility and a tapering off in activity. The relationship between India’s pandemic curve and its mobility curve, worryingly, appears to be traversing down this path, where both lives and livelihoods could once again be at risk.
To be sure, India’s workplace mobility has rebounded from the lows in April, but instead of reverting to the pre-pandemic normal, it has started to plateau out since mid-June. Similar evidence of stagnation is visible in other mobility indices around retail and recreation, essentials, transit stations and driving traffic. The plateauing trend is also visible across various states.
The plateauing mobility curve could be the result of localised lockdowns that are back in vogue based on geography (parts of Maharashtra, West Bengal and Tamil Nadu) or timing (for example, weekend lockdowns in Uttar Pradesh). However, as the stagnation in mobility preceded the implementation of these administrative measures, this suggests that even without a government diktat, rising cases may have resulted in the people scaling back their activities.
This isn’t necessarily a common phenomenon — countries like South Korea, Thailand, or Malaysia that have been more successful in flattening their pandemic curves have been able to largely duck this phenomenon.
The direction of travel in India’s pandemic-mobility curve offers two inferences on economic activity and its composition. First, activity has bounced from the lows of April, but easing the lockdown before controlling the pandemic is now stalling activity significantly below normal as the post-lockdown euphoria is ebbing.
To track the pace of economic activity normalisation, we combined intelligence on mobility with “ultra” high-frequency trends in power demand and the labour market to arrive at a weekly tracker called the Nomura India Business Resumption Index (NIBRI). We estimate that the index dropped from 100 per cent at the end of February to a lockdown low of 45 per cent at the end of April. Since then, as the lockdowns were relaxed, the NIBRI robustly recovered to around 70 per cent in mid-June. However, since then, it has remained largely stuck at around 30 percentage points below the pre-pandemic levels.
Second, even this bounce-back is not broad-based and the pace of revival differs across sectors. To assess this, we estimate a normalisation index — a proxy measure of peak capacity utilisation — for various high frequency indicators. The gaps are glaring.
Consumption demand has normalised to 64 per cent of peak capacity in June from 41.3 per cent in May, but this is largely because relatively good monsoons and the government’s rural focus have succoured rural consumption demand. In contrast, urban consumption demand is more subdued. On the supply side, the industrial sector recovered to 76 per cent of peak capacity in June from 69 per cent in May, but the pace of recovery in services remains glacial at sub-20 per cent, which is not surprising, as they are more contact-intensive. Overall, aggregate demand has continued to lag aggregate supply.
With mobility data now plateauing, the key risk is that this could be a precursor of a potential derailment of the ongoing nascent and narrow domestic recovery.
This economic backdrop presents a big challenge for policymakers because a long period of low capacity for firms will translate to a bigger hit to profitability, which in turn risks marring prospects of a recovery in capex, employment and debt sustainability. It may also translate into a larger knock-on effect on financial sector balance sheets, if both corporates and households struggle to recover quickly to pre-pandemic normality.
To tide over this long duration fight and avoid permanent damage, more targeted fiscal support is necessary. The current package that has been announced is essentially a “survival kit” of free food and subsidised credit to last the lockdown storm, but is not enough to survive the tough terrain. A much larger package focused on boosting incomes of the vulnerable groups and supporting contact-intensive sectors (for example, hospitality, tourism, aviation) to tide over this long journey is important.
All of this will inevitably cost a lot, amplified by the loss in revenues from the endemic slowdown. Even without further fiscal measures, we currently project the centre’s fiscal deficit will slip to around 7.5 per cent of GDP this fiscal year, nearly 4 percentage points above the budgeted target.
As Indian firms embark on a debt de-leveraging cycle, the role of monetary policy will be to ensure that the cost of capital stays low, financial conditions stay easy and lack of liquidity does not lead to insolvency. Financial stability remains the top priority.
In its latest Financial Stability Report, the Reserve Bank of India estimates that the gross non-performing assets of banks could increase to 12.5 per cent by March 2021 in its baseline macro stress test for credit risk, from 8.5 per cent in March 2020. This may worsen to 14.7 per cent in a very severely stressed scenario. In this backdrop, policymakers also need to be pre-emptive in dealing with banking sector problems, rather than allowing them to become a drag in the medium-term.
To its credit, the RBI has done a commendable job in juggling a number of balls: Lower interest rates to reignite credit growth; adequate liquidity for weaker balance sheets; building external buffers and choreographing the government’s financing programme. The challenge, however, is far from over, but its duration remains uncertain.
If an unyielding pandemic curve is flattening the mobility curve, and in turn threatening the economic one, the adage that “health is wealth” has never been more literal.
Varma is chief economist for India and Asia ex-Japan at Nomura, Nandi is the India economist at Nomura
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