November 3, 2020 3:30:37 am
Seen against the depths to which economic activity had plummeted in the initial phase of the national lockdown, the sequential improvement in economic indicators over the past few months suggests that the process of normalisation of economic activities is well underway. As indicated by leading indicators, both aggregate demand and supply have witnessed an improvement with the easing of lockdown restrictions. However, one must be cautious while interpreting these numbers. For instance, large parts of the high-contact services sector such as airlines, hospitality and tourism continue to lag the industrial sector, and their revival in part depends on the success in containing the virus.
On the production side, signalling a continuing pickup in the supply side, the Nikkei’s manufacturing purchasing managers index, released on Monday, rose to 58.9 in October — indicating the fastest expansion in factory output in over a decade. Similarly, the index of eight core industries in September was almost at the same level as last year, with coal, electricity, and steel swinging into positive territory. On the consumption side, indicating a pickup in demand, the goods and services tax collections for the month of October rose to an eight-month high of Rs 1.05 lakh crore — 10 per cent higher than collections over the same period last year. While part of this rise could be attributed to the September 30 deadline for claiming input tax credit and the reconciliation for businesses for 2019-20, the continued rise in e-way bill generation also points towards improvement in activity. Recent reports also suggest that demand for both four-wheelers and two-wheelers appears to be firming up. Sales for Maruti Suzuki, for instance, stood at 1,63,656 units in the domestic market, up 18 per cent over the same period last month. Similarly, Hero MotoCorp reported a spike in demand from urban and semi-urban areas. Railway freight revenue was up in the first half of October as were diesel sales, which reportedly witnessed the first year-on-year growth since February. This sequential improvement in economic activity is also reflected in preliminary results of corporates for the second quarter of the current financial year, which indicate a turnaround in performance after the collapse in the first quarter.
Yet, this optimism needs to be tempered. For one, part of the recovery in economic activities can be traced to the ongoing festive season. Whether this momentum sustains, or the extent to which it sustains, beyond the months of October and November remains to be seen. Then, there is the possibility of a surge in COVID-19 infections during the festive season, which could heighten risk aversion. This coupled with continuing income uncertainty could adversely impact the growth trajectory going forward, though its impact will be visible with a lag.
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