Is revival of Indian economy sustainable?

Consumers remain cautious in spending amidst strength of economic revival (MIG photos/ Varsha Singh)

In October, India’s services sector grew for the first time since February reflecting the reopening of hotels, restaurants and shopping malls around the country. Accordingly, the Purchasing Managers’ Index (PMI) for services rose sharply to 54.1 pc for October as against 49.8 pc from September, according to data released by IHS Markit, a data analysis firm.

This report came on the heels of another strong performance in October, this one from the manufacturing sector which reported a sharp spike, propelling the PMI to a 13-year-high as the sales of a variety of products notably the automobiles registered a growth. According to services companies, the relaxation of Covid-19 restrictions enabled them to secure new work and improve business activity in October.

“In both cases, the increases ended seven-month sequences of reduction. Moreover, optimism towards the year-ahead outlook for output strengthened. Still, there was another monthly decline in employment. On the price front, the rate of input cost inflation picked up to an eight-month high, but there was a softer rise in prices charged for the provision of services,” IHS Markit said.

Just a few days back, IHS Markit India said that its PMI for manufacturing increased to 58.9 in October from 56.8 in the previous month. Manufacturing increased at the strongest pace recorded since late-2007 while the upturn in sales was the strongest since mid-2008. The economy picked up speed in September as demand for mobile phones, home appliances and cars surged after a prolonged slump during the festive season when consumers usually make big-ticket purchases. Social distancing and lockdowns helped propel e-commerce across various sectors including healthcare, retail, travel even as brick and mortar retailers struggled for survival.

Another positive signal indicating strength in the economy, long enfeebled by the pandemic and the unplanned and catastrophic lockdown, was the monthly collection of the Goods and Services Tax (GST) that crossed key benchmark figure of INR 1 trillion for the first time since February. At INR 1.05 trillion the collections were up 10 pc compared to September, which itself had shown a rise of 4 pc over August receipts.

The spate of positive data was a boon for the beleaguered finance ministry which has been battered for its response to the pandemic and the tightfisted approach for the revival at a time when almost all governments around the world have opened their coffers to help their citizens and the industry in getting back on track.

“We are actually seeing an improvement in all parameters generally and we are expecting further improvement in the month of November and this should continue. Hopefully the economy should be back on rails and it is moving much faster than what had been anticipated by a lot of experts and economists,” Tarun Bajaj, secretary finance, told media while releasing the figures for the GST collections in October.

Though restaurants have reopened after lockdown, consumer footfall remains patchy (MIG photos/Varsha Singh)

Dipping jobs & uncertainty over post-festival health of economy

But not every data for October has been positive. Employment, which has been battered in an unprecedented fashion by the pandemic, globally and in India, saw another dip in September says a report by Mumbai-based economic data analysis firm CMIE.

“Provisional estimates for the month of October released on November 1 confirm that the period of smart recovery of May, June and July has run its course. August, September and October do not show any significant further recovery. And, the rebound so far falls short of reclaiming levels that prevailed before the lockdown,” CMIE says on its website.

It goes on to say that labour participation rate at 40.66 pc in October 2020 was exactly what it was in September 2020. It was much lower than the 42.9 pc it was a year ago in October 2019. For reference, the labour participation rate had never dropped below 42 pc before the lockdown. So, the participation rate as of October 2020 continues to remain significantly lower than the levels seen till February 2020.

“The labour participation rate had dropped by 7.08 percentage points in April. Between May and July, it recovered 5.04 percentage points. But it has made negligible further recovery in the last three months. India therefore still suffers a loss of nearly two percentage points in labour participation rates compared to pre-lockdown levels,” CMIE says.

The lockdown and its aftermath has led to tens of millions of jobs lost, according to various industry reports. The worst projection for the job losses puts it at over 120 million jobs. Though many of these losses have been made up for in the past four months of easing of lockdown, the job security in the market as well as unemployment remains below optimum and this is bound to impact the spending plans of households over the mid-to-long term. This makes economists apprehensive about the sustainability of the revival and most of them say that it may yet be too soon to start celebrating.

Most of them believe that the actual strength of the economy may be known only in December or later, once the festival season is over. “Given the festivities, collection in November could also be robust. We would need to see if this trend held after November as well,” says Pratik Jain, partner at PwC, a global consultancy and audit firm. Another economist, with credit rating agency, ICRA, was quoted by media as echoing similar sentiments. “We remain as yet unconvinced on the persistence of this trend after the festive season is over, after the pent-up demand is fulfilled,” said Aditi Nayar, principal economist, ICRA.

But the individuals, especially those belonging to the lower middle class and the poor, as well as the industry in general is expected to remain cautious about the future in the absence of a strong government response in helping propel the revival of the economy. “There are signs of pent-up demand that could taper off post the festive season as there is still much uncertainty related to the virus and government’s fiscal response remains conservative,” Tanvee Gupta Jain, an economist with UBS Securities, part of Swiss bank, UBS.

Most predictions for the GDP in the current fiscal to plunge over 10 pc, with some experts putting the figure closer to 11 pc. As of now the projections for the next fiscal point to a strong bounce back in the GDP, mainly due to the low base. But the next four months may be crucial to determine the path that the Indian economy will take.

With mixed signals from the economy and cautious approach of people and the industry, the mandarins in the North Block may yet want to wait before opening the Champagne bottle.