Economic recovery begins, but of what kind?


The Indian economy went into a tail-spin due to the second wave of Covid-19 infections, but with the infection curve on a downward trajectory and the unlock process underway — Delhi and Mumbai removed many restrictions on June 7 – the latest high frequency indicators show that the economy has started recovering. However, given the experience of the economic recovery after the first wave, it is also important to look into the nature rather than just its trajectory.

NIBRI has gained ten points in the last fortnight

The Nomura India Business Resumption Index (NIBRI) jumped to 69.7 in the week ending June 6. To be sure, NIBRI bottomed out in the week ending May 23 itself when it fell to 60.3. It increased to 62.9 in the week ending May 30. The latest value of NIBRI is comparable to where it was in the week ending June 21, 2020. A NIBRI value of 100 indicates pre-pandemic level of economic activity. The question to ask is whether NIBRI will take last year’s trajectory or grow at a faster pace.

“Near-term growth dynamics remain crucially contingent on two factors — the pace of relaxation of lockdowns and the pace of vaccinations. The former will determine the speed of recovery in mobility and broader economic activity, while the latter will be important for ensuring that the number of cases remains in check and the lockdown easing remains sustained”, said a note by Nomura economists Sonal Varma and Aurodeep Nandi.

Job market is still bad

Employment numbers from the Centre for Monitoring Indian Economy (CMIE) suggest that the employment scenario continues to be worrisome. The unemployment rate has been in double digits in the last four weeks. It actually increased from 12.15% to 13.62% between the week ending May 30 and June 6, even though NIBRI – which is supposed to be a proxy for economic activity – went up. “The Indian labour market is in its worst condition since the nation-wide lockdown months of April and May 2020,” Mahesh Vyas, the Managing Director of CMIE wrote in an article published on the CMIE website. “Employment has been falling since January 2021 when it touched a recent peak of 400.7 million. It has fallen in each of the four months since then. It fell by 2.5 million in February, 0.1 million in March, 7.4 million in April and then by 15.3 million in May. The cumulative loss since January therefore is a substantial 25.3 million. This is a significant 6.3% fall in the employed workforce over a four-month period”, he added. CMIE is the only high-frequency source of employment indicators in India. The CMIE numbers are in keeping with a fall in perception on employment in the latest round (May 2021) of RBI’s Consumer Confidence Survey.

Companies are deleveraging rather than investing

Labour markets lagging behind output growth has led to what has been termed as profit led growth in the Indian economy in the last fiscal year.

A June 8 research note by Soumya Kanti Ghosh, Group Chief Economic Advisor at the State Bank of India, shows this clearly. Ghosh looked at results of 1,000 listed companies for 2020-21 and found that profits grew at a much faster pace than revenues in most sectors. “We observed a 4% decline in top line (revenue), while EBIDTA and Profit after Taxes (PAT) grew by 19% and 54% respectively over FY20. However, excluding BFSI (banks, financial services and insurance) and refineries, the set reported 2% growth in top line and 36% and 34% growth in EBIDTA and PAT,” the note said.

Also Read | After the pandemic, the centrality of the Blue Economy in recovery

Lack of demand, reflected in poor revenue growth, also means that companies are deleveraging instead of investing even though the monetary policy environment continues to be accommodative. “One direct corollary of the pandemic in FY21 was a distinct slowdown in bank credit growth that has also continued into FY22. We believe such low credit growth was a direct fallout of corporates rapidly deleveraging by repaying high-cost loans through funds raised through bond issuances”, the note added.” Interestingly, corporate willingness for new investments remains low currently as the economy is still recovering from the devastating second wave.”

If firms continue to behave prioritise deleveraging instead of investing, it is bound to perpetuate a vicious cycle of low investment demand leading to low mass incomes leading to low consumption demand, which will generate further headwinds for investment demand. This is exactly where the role of a fiscal stimulus, which can give a boost to mass demand and break this vicious cycle, comes in.

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