The first advance estimates of GDP growth for the current financial year are due from the National Statistical Office on January 7. In December last year, during the Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) had revised upwards its previous forecast, pegging the contraction at 7.5 per cent. The growth estimates for the first two quarters of this year were -23.9 per cent and -7.7 per cent, respectively. It is important to note that the first advance estimates for 2020-21 growth are based on projections from a seven month period (April–October), using a mix of the first and second quarter corporate results, agriculture production data, transport and freight estimates, the index of industrial production, bank credit and deposits, and multiple other indicators. The second advance estimates will be released in end February, based on a more comprehensive set of data.
We have retained our own growth forecast for the current financial year at -7.6 per cent, but there are signs, beginning in late November of a stronger economic recovery. Our 2021-22 GDP growth forecast is at 11 per cent plus.
First, a set of recent news from government and industry releases: In December, GST collections were at a record high, passenger vehicle dispatches to dealers were fairly robust, and the Manufacturing Purchasing Managers Index (PMI) continued to remain strong. Coupled with positive reports of the order book of a leading manufacturer of a key intermediate input of manufacturing machinery and automobiles — ball bearings — the signals of a strong recovery are quite broad-based with a positive momentum.
This inference is reinforced by signals from an extensive set of 39 leading and concurrent indicators which we track. These can be broadly grouped into domestic and external activities (manufacturing and services, consumption and investment), fiscal numbers, mobility, employment and payments. Early indicators for December activity based on a composite index of a weighted mix of these indicators suggests that economic activity has pretty much come back up to pre-lockdown levels.
One of the key metrics we track in this index is electricity consumption. Based on the 2019 demand patterns, residential electricity was up 25 per cent; extreme cold weather is likely to have pushed up household heating consumption in the north and parts of the east. But approximately half of the demand is from industry, suggesting that activity has accelerated across all geographies.
Second, a critical sector in the recovery story is residential real estate, given the large backward and forward sector linkages. Mumbai, a weather vane of overall housing demand, recorded a massive increase in registrations (and hence sales) of housing units. Contributory factors would include a cut in stamp duty rates from the normal 5 per cent of the sale value to 2 per cent (which is quite significant given Mumbai’s relatively high home prices), steep cuts in developers’ sale offer prices and low home-loan rates. Residential demand is also evident in home loan off-take from banks, even as credit from NBFCs has begun to increase, after an almost complete shutdown in 2019-20.
The third is digitalisation and the big-tech developments of the last few years: App-based mobility metrics provide valuable insights on a city basis. Google mobility data across different geographies also points to a normalisation of activity. However, work from home is likely to become embedded as indicated by trends in travel to workplaces. This is supported by multiple data series based on the digitalisation initiatives taken by the government, RBI and ancillary institutions. Payments data, whether via UPI or FastAG payments or GST E-way bills, also suggest a strong activity recovery, based on transport data.
One strong set of inputs into our understanding of activity are the reported financial results of companies for the July-September quarter. Excluding petroleum and trading companies, net sales of the largest companies was flat relative to the same quarter last year, while operating profits were up 17 per cent (year-on-year). This leads to questions on a key implication of the recovery and the consequent crafting of the evolving stimulus response — an uneven and unequal recovery. The financial results reflect the performance of the largest, strongest and most resilient companies. Yet the impact of the public health crisis response is likely to have been disproportionately felt on smaller and informal enterprises. An economic shock of this magnitude is bound to have deep negative residual impacts — “scarring” — on activity, behaviour, confidence and resilience. All of these will have effects on sustaining the momentum of recovery and India’s potential growth.
Despite the best efforts of forecasters, the level of uncertainty remains high. The government and the regulators, particularly the RBI, have been proactive and dynamic, responding aggressively in implementing a palpable “survive, revive and thrive” strategy. Given the shifting nature of public health markers, despite the eventual spread of vaccines, policy will have to “cross the river by feeling the stones”. But the main policy narrative in 2021, as the growth momentum gains traction, will be the path to normalisation from the extreme accommodative monetary and fiscal policy stance, with measures balanced between continuing a targeted stimulus for the most vulnerable and impacted segments, and normalisation of the extraordinary measures to counter the deeply contractionary effects of the pandemic.
Past experience has shown the likelihood of inflationary and financial sector risks post the adoption of a prolonged loose policy. The RBI has demonstrated a deep ability to manage the crisis and will now have the difficult task of initiating and communicating the normalisation strategy, particularly the gradual draining of the surplus liquidity over the course of 2021, especially with all major central banks likely to continue with their own loose policies. On the government’s side, we have already seen the initiation of deep structural reforms to get India back to a sustainable high growth trajectory. The forthcoming budget proposals for 2021-22 (and beyond) are likely to be key beacons for the “thrive” phase.
This article first appeared in the print edition on January 7, 2021 under the title ‘Path to the next normal’. The writer is executive vice-president, Business and Economic Research, Axis Bank. Views are personal.