With the second wave of infections in India having largely subsided, despite some persistence in a few states, economic activity in many sectors and geographies has recovered to pre-second-wave levels, with some segments doing better than even in February 2020. At the same time, many developed countries, despite risks from festering infections, have been widely vaccinated, and are poised for strong growth. This will compel their respective central banks to begin normalising the extremely loose monetary policies earlier than anticipated. This will require a reorientation of India’s stimulus strategy from the largely broad-based measures to a more targeted approach to certain sectors, to reduce the risk of overheating the economy, with inflationary pressures having remained persistent for many months.
On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling. Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 per cent, reflecting disquiet about the durability of the recovery once the fiscal stimulus starts waning. China recently announced a 0.5 per cent cut in the required reserves ratio for banks. Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering. However, some smaller global central banks, considered to be the “canaries in the mine” of global rate change cycles, have started normalising their respective Quantitative Easing programmes.
In India, there are signs that the recovery momentum began to strengthen from mid-June, despite lockdowns still in place in economically important states, and of demand accelerating, despite capacity utilisation in many industries below thresholds needed for the next round of private investments. In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 per cent range. We track a set of close to 40 high frequency metrics, many of which are in the nature of “nowcasters”, concurrent or minimally lagging data, based on which we have constructed a Composite Leading Indicator (CLI). This indicator shows that activity in July is likely to have reached well above pre-second-wave levels. The CLI readings are based largely on Google mobility signals and electricity consumption, both of which need to be interpreted carefully for exogenous influencers like hot weather, but the trends seem to be reinforced by e-way bill filings for GST payments.
Tax collections, another indicator of activity, even if a bit skewed, support this view. Corporate tax collections in the April-June quarter of 2021-22 have been robust. As of mid-June, corporate tax collections, post refunds, are over Rs 1.85 lakh crore, double that of the corresponding quarter of 2020-21 — remarkable, even adjusting for the complete lockdown for a large part of that quarter. Collections reportedly have been from a range of sectors — steel, metal, commodities, cement, pharma, banking, IT. Obviously, part of this would have been due to high metal prices in the quarter, but the resilience of large corporates is evident across the spectrum, suggesting that B2B (business-to-business) demand is still strong. Even GST collections seem to have been quite robust.
A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture, but the narrative supports the trends of the CLI noted above. Dealerships’ feedback suggests that demand for consumer durables (ACs, refrigerators, coolers) remains robust. The automobiles sector is a bellwether. And retail registrations improved in June across segments. A sharp recovery in the medium and heavy commercial vehicles (CV) segment is said to be limited due to BS-VI transition production bottlenecks, but light CV sales are good, with the booming e-commerce ecosystem. Passenger vehicles growth also remained subdued with continued global semiconductor shortages. Two-wheeler sales remained muted (compared to June 2019 levels) due to an uneven recovery in rural areas. Demand for residential housing has revived strongly in many metros and tier-I and tier-II cities, due to a combination of discounts, low interest rates and state government incentives of stamp duty cuts. This is likely to have growth multiplier effects for many intermediate supply segments.
Demand emanating from rural geographies is important for sustaining recovery. Demand for work under MGNREGA suggests continuing stress. Monsoons will be a big contributor. Sowing of kharif crops stalled in late June, but is predicted to pick up again in mid-July. Renewed government intervention is required.
Worries about inflation remain heightened, arising from the twin impulses of food and crude oil prices, and could force a monetary policy normalisation faster than presently anticipated. Effects of potential spillovers from the earlier noted risks of global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility and maintaining growth incentives.
Access to credit remains a crucial input in the recovery matrix, particularly for small and micro enterprises. The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilising the solvency (and cash flows) of micro and small businesses. The expansion of this subvention is probably the most effective template to incentivise credit flows, leveraging on the government’s balance sheet to take on the first loss risks. At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
Shifting the lens to India’s medium-term growth potential, the encouraging aspect of the recovery is the resilience of many mid- and large-turnover companies in the face of the debilitating public health crisis. Corporate health has improved, with lower debt on balance sheets. Adoption of technology is widespread; this will boost productivity and competitiveness. But these factors reinforce trends in consolidation and market power. It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation. Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 per cent plus growth path.
This column first appeared in the print edition on July 28, 2021 under the title ‘Unlocking recovery’. The writer is executive vice-president and chief economist, Axis Bank. Views are personal