The Indian economy appears to have weathered the COVID storm better than what most had expected. The contraction in economic activities in the second quarter has been shallower than expectations, and as leading economic indicators suggest, the momentum thereafter does appear to have remained healthy, even past the festive season. While the pace of recovery in different parts of the country has not been the same, a study by economists at the Reserve Bank of India (RBI) notes that even the western region, which had lagged behind others in the recovery curve, has exhibited positive momentum September onwards. In fact, mobility levels have returned to almost pre-COVID levels in all cities by early December, signalling a return to normalcy. As the RBI study notes, “Indian economy is pulling out of COVID-19’s deep abyss”, and is moving “towards a place in the sunlight”. While growth is expected to be marginally positive in the third quarter, the study notes that if the current momentum in activities persists, the bounce back in the fourth quarter may actually be stronger than what baseline scenarios indicate.
On the demand side, while there appears to have been some moderation after the satiation of pent up and festive demand, household demand continues to expand. Electricity consumption is up, as is petrol consumption. GST collections remain above the Rs 1 lakh crore mark, and both inter-state and intra-state movement of goods continues to show an uptick as reflected in the e-way bill data. Non-oil imports have returned to pre-COVID levels, and RBI’s survey of consumers indicates that sentiment has improved, as employment conditions have begun to look up. On the supply side, manufacturing activity has picked up, as has the services sector, though high contact-intensive services continue to remain below pre-COVID levels. Financing conditions for firms remain conducive as corporate bond spreads have fallen to pre-COVID levels. And as per the RBI’s industrial outlook survey, firms were hopeful that the rebound in activities would gain momentum. Though, as a CRISIL report notes, the smaller companies, with low bargaining power and cash reserves, remain in the red.
The RBI expects the “above-the-line” fiscal stimulus to boost growth by close to 2 per cent this year. Though central government spending has till October been almost at the same level as last year, presumably expenditure will pick up as revenue visibility improves. This would impart an expansionary impulse to the economy in the months ahead. Alongside, the rollout of the vaccine is also likely to strengthen household demand, especially for high-contact services. However, since the structural challenges that pre-date the COVID pandemic continue to persist, a full recovery to pre-COVID levels remains distant.