From the lows observed in April, economic activity in India has gradually climbed up in the weeks and months thereafter. While uncertainty looms over the pace of the recovery — some indicators suggest that economic activities have levelled off at lower levels — the picture that emerges is of an uneven, two-paced recovery. The recovery in the manufacturing sector, especially in some segments, appears to be far greater as compared to the pick-up in the services sector. This trend is observed in the purchasing managers index (PMI) for the two sectors. After plummeting to a record low of 27.4 in April, the PMI manufacturing rose to 47.3 in June, dipping marginally thereafter to 46 in July. In comparison, the PMI services, which plunged to a low of 5.4 in April, has limped thereon, touching 34.2 in July. It is unlikely that the gap between the two will narrow significantly in the near term.
Faced with grim income prospects, households have curbed their discretionary spending. Services, non-essentials in particular, have suffered disproportionally from this fall in demand. Adding to that is the fear of moving in crowded places which is also constraining consumption of services such as restaurants and hospitality, travel and tourism and others despite the easing of lockdown restrictions. There are several indications to this effect. For instance, reports in this paper reveal that despite restaurants and eateries being allowed to reopen, more than 60 per cent of licensed eateries in prominent areas of Delhi continue to remain shut and are yet to renew their trade/health licences. The effects of this collapse in demand for services, and non-essential manufacturing, on jobs and incomes are quite visible. As reported in this paper, 40 of the BSE 100 companies that have announced their results for the first quarter of the current financial year have seen a decline in their aggregate employee expenditure — indicative of a fall in both employees and employee costs. Some indication of the extent of the losses incurred during this period will reflect in the quarterly GDP estimates (to be released at the end of this month) in the “trade, hotels, transport, communication and services related to broadcasting”, and the “financial, real estate and professional services” category.
The near term prospects don’t appear promising. With income and job losses, self-imposed restrictions on movement, and localised lockdowns to deal with the spread of the COVID-19 pandemic continuing to influence consumption patterns, demand for services is likely to remain muted. In such a scenario, both individuals and businesses are likely to continue to be risk averse. Much will depend on the success in containing the spread of the COVID-19 pandemic.