With the advent of autumn, the domestic economy is appearing to show some positive signs of stirrings in the real sectors. This is conclusively borne out by the latest review of the Department of Economic Affairs, Ministry of Finance released recently.
Caught in the crucial battle to reduce the massive uncertainty about Covid 19, while persisting with the challenging task of emergency reliefs to the hardest hit sections and sectors of the economy, the Government had to resort to stringent lockdowns. This, the review noted, resulted in the sharp contraction of 23.9 per cent in the gross domestic product (GDP) growth rate in the April-June quarter of the fiscal 2020-21. But, this also helped to restrain the pandemic-spurred death rate to one of the lowest in the world, given our huge population. As a corollary to the pro-active preventive procedure, the economy is now witnessing a sharp “V-shaped” recovery. In technical parlance, this means that the economy suffers a brief spell of decline with a clearly defined trough, followed by a strong recovery.
The review contended that as most countries the world over began unlocking to resume activities in the quarter beginning July, recovery is under way globally with India too logging a sharp V-shaped recovery. Various high frequency indicators that point to V-shaped recovery include, among others, auto sales, tractor sales, fertilizers sales, railway freight traffic, steel consumption and production, e-way bills, GST revenue collection, daily toll collection on highways, retail financial transactions, manufacturing Producers’ Manufacturing Index (PMI), performance of core industries, capital flows and exports. The Union Minister for Commerce & Industry Mr. Piyush Goyal too, said at a meeting with Export Promotion Councils (EPCs) earlier that the country’s exports as well as imports are showing positive trends as the outbound shipments are approaching last year’s levels, after marking a sharp dip in April this year due to the pandemic.
As per the Finance Ministry review, the worst seems to be well behind, as high-frequency indicators reveal an improvement from June onwards. Even as the macro-economic indicators move towards the path of the V-shaped recovery, uncertainty still persists because of the pandemic and the concomitant impact on the discretionary demand, the Ministry maintains in the review by way of abundant caution.
Corroborating this, the review pertinently pointed out, that “Unlike previous crises that originated from economic factors, the uncertainty in the current crisis stems from health factors originating from the pandemic. As a result, the uncertainty on discretionary items is likely to influence recovery”. However, it qualifies the premise that the arrival of the Covid vaccine would signal the end of this uncertainty and bring back discretionary consumption to pre-Covid levels.
The review also emphasized that risk-taking sentiment has returned with global and domestic equity markets on an untamed recovery path, reaching pre-Covid highs and recouping most of their losses. Indian companies have raised a record US$ 31 billion in equity capital in 2020 with banks reinforcing their balance sheets to prepare for future economic uncertainty and corporates tapping into the elevated liquidity levels. Foreign appetite to lap up Indian equities has risen sharply, with investors from abroad buying US$ 10.3 billion of new shares in the three months (June to August) with the quality of issuers in the market from the top 100 companies.
For the agrarian sector which is the sole exception to the overall steep contraction in the GDP by clocking a growth rate of 3.4 per cent year-on-year in April-June, the global food price inflation is moving to the positive zone. This is a salutary development for domestic farmers, prior to the harvest season for the ‘kharif’ crops, bringing terms of trade to their benefits.
With the economic engine slowly but surely re-starting, the stakeholders in the real sectors remain confident that the requisite supportive policies of the government duly backed by financial and fiscal props would be in place.
Script: G. Srinivasan, Senior Economic Journalist