The Indian economy has beaten two straight quarters of recession, expanding 0.4% in the three months to December 2020, a promising turnaround, but theres a twist: the V-shaped recovery could be optical and theres a missing middle.
This is what it means: while theres been a fast pick-up in growth, resulting, visibly, in a V-shaped recovery, most analysts agree it is never going to be close to the pre-Covid trend line. This trend line is sort of a trajectory that gross domestic product (GDP), the most widely used measure of income, should have taken, had there been no pandemic.
To be sure, recovery has been skewed. Growth has skipped small low-end manufacturing firms in the middle, the largest source of jobs while soaring oil prices and a fresh wave of Covid cases in some states are dangers to watch out for, economists said.
There is an optical rebound in growth because growth is below the trend line. Growth (for next fiscal ) is high but in real terms, the size of the economy next fiscal will be a mere 2% bigger than what it was in fiscal 2020, said Dharmakirti Joshi, the chief economist of CRISIL Ltd, a rating firm. Despite the growth, Joshi said the economy will suffer a permanent output loss of 11%.
On Tuesday, CRISIL Ltd said it expects GDP growth to rebound to 11% in fiscal 2022, after an 8% contraction this fiscal.
The turnaround has to be more broad-based to bring back at least 14 million jobs estimated by the Centre for Monitoring of the Indian Economy to have been lost. The pandemic hit the services sector harder than manufacturing. Within services, the sharpest decline was in trade, hotels, transport, and communication services, which account for roughly 16% of employment.
The biggest drag continues to be low demand. People, especially poorer households, arent spending much on a variety of goods and services, such as consumer durables, food items, clothing, health, transport, and education.
Private final consumption expenditure, a measure of how much households spend, narrowed its slippage in the December 2020 quarter but continued to shrink 2.4% after having tanked by 26.3% and 11.3% in the preceding two quarters, according to official data.
The missing middle
Limping small businesses, which make up more than a quarter of Indias GDP and over 40% of manufacturing output, are key to a broad-based recovery. They are the missing middle, Joshi said. The pandemic caused revenues of smaller firms to plunge sharper than larger firms, the main reason for job losses.
The dynamics of domestic demand and trade continue to be unfavourable for small businesses, Joshi said. Recovery has skipped labour-intensive sectors of mass employment due to lower bargaining power and cash crunches.
Exports are recovering for large industries but remain weak for smaller manufacturing units, a significant employer of the semi-skilled workforce. Labour-intensive sectors such as garments, like leather goods and gems and jewelry account for 18% of Indias exports.
Between April 2020 and February 2021, garment exports fell 24.5%, leather exports contracted 32% and gems and jewellery exports shrunk 34%, data from the commerce ministry shows. This shows that the mass-employment sectors are yet to recover.
According to CRISIL Research, less than 20% of 400 smaller companies (among 800 listed ones) saw positive revenue growth in the first half of fiscal 2021, compared with 35% of the top 100 companies.
Lending by risk-averse banks has been the weakest for micro and small enterprises, while large firms have managed to leverage financing options well.
The seesaws in business resumption mean the economy is yet to be sure-footed. The Nomura India Business Resumption Index fell to 95.2 for the week ending March 7 versus 98.1 in the prior week, indicating the gap from the pre-pandemic normal has slipped to 4.8 percentage points from only 0.7 percentage points a fortnight earlier.
Help at hand
Growth depends on a kick-starting of the countrys investment cycle. Analysts say the National Infrastructure Pipeline and production-linked incentive (PLI) scheme to 14 sectors announced by the government are post-pandemic investment lifelines.
For instance, CRISIL Researchs analysis of the PLI scheme indicates potential incremental revenue generation of 35-40 lakh crore over the coming five fiscals across 14 sectors, along with a 2-2.7 lakh crore capital expenditure in the next 24-30 months.
Also Read | Indian economy on upswing, says ex-NITI Aayog vice chairman Arvind Panagariya
In the absence of a PLI-like scheme, infrastructure capital expenditure would have been still high (due to government spending), but capital expenditure in non-infrastructure sectors a big provider of jobs would have remained flat in real terms, said Hetal Gandhi, director of CRISIL Research. Non-infrastructure capital expenditure makes up a third of total capital expenditure.
Fresh risks
Rising pandemic cases in a few states remain a near-term risk and so do oil prices. Active Covid-19 cases currently are 2% of total cases and recoveries are at more than 97% of total cases with daily cases fewer than 20,000.
The sharp resurgence in cases while still not a pan-India phenomenon, may prove disruptive if mobility becomes affected, said Sonal Varma, an economist with Nomura Securities Ltd. Two districts in Maharashtra have imposed restrictions on night movement along with weekend lockdowns.
Maharashtra, Kerala, Punjab, Karnataka, and Gujarat, where there is a fresh wave of Covid cases, together accounted for 83% of all new cases in the last week of February.
Net importers of energy such as India are also bearing the brunt of pricier oil, which could weigh on recovery and stoke inflation, analysts said. Global oil prices have surged 30% this year, as oil producers cut output. Petrol prices have since crossed the psychological mark of 100 to a litre in some cities.
Policymakers are often more concerned about core inflation that doesnt include volatile components such as food and fuel costs. However, if oil continues to rise, it will limit the room of the RBI to support the economy with lower interest rates and inflation could become broad-based.