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Home >Economy >Recovery is on, but there are lasting scars

Economic activity picked up nearly as swiftly in June as it had shrunk in May, when covid restrictions were at their peak. As states exited lockdowns, high-frequency indicators promptly returned to April levels, making the economic hit of the latest wave far less enduring than last year’s, suggests the latest update to Mint’s monthly macro tracker.

Nine of the 16 indicators considered in the tracker were in the red, or below their five-year average trend, in June. Four were in green, or above that trend, while the rest were in line with it. In May, 12 indicators had fallen into red - the worst reading since April 2020, when the country was under a strict lockdown.

The June reading was not yet on a par with the recovery that the tracker had recorded by March. This suggests that the re-ignition has some distance to cover. A case in point is business activity data, measured by the monthly purchasing managers’ index (PMI), which posted an unexpectedly sharp contraction in June. The consumption environment is also under stress: inflation stayed high in June even as jobs remained scarce and wages subdued.

Launched in October 2018, Mint’s macro tracker provides a comprehensive state-of-the-economy report based on trends in 16 high-frequency indicators across four segments: consumer economy, producer economy, external sector, and ease of living. After the low of April 2020, India had seen gradual improvement, especially in the consumer and producer segments, until the second wave upended that recovery.

The June data holds promise, and early data for July suggests the momentum may have sustained this month as well. Nomura’s business resumption index, which uses data on mobility, electricity demand and workforce, has returned to a reading close to pre-pandemic levels. Data for a broader set of indicators for July will be available only in August.

Mixed Signals

The consumer economy segment, which turned all red in May, had only two indicators below their five-year average trend in June. As was the case after the first wave, tractor sales led the way, posting robust growth after being hit hard in April and May by the rural impact of the virus.

Passenger vehicle dispatches declined at an annualized 4% over the two-year-ago period—the softest decline in eight months. But vehicle registrations, which bear a closer link with retail sales, slowed much more (15%), and were still behind pre-second wave levels. Consumption demand picked up slower than automakers expected them to.

Air travel was slow to resume, too: domestic airlines carried 3.1 million passengers, the second lowest footfall in 10 months (after May). This translated into an annualized 49% decline compared to the two-year-ago period. The tracker now considers annualized growth over the past two years to compare current levels of activity with the pre-pandemic period, and to avoid the base effect distortions in year-on-year comparisons.

The contraction in the PMI composite index—for the second straight month—was led by the contact-intensive services sector, which has been hit badly by poor demand and elevated input costs. But the impact of the second wave caught up with the manufacturing sector as well, which went into contractionary territory, after recording an expansion in May.

Stress Points

Trends in the external sector—measured in the tracker through trade and currency moves—have offered the best ray of hope right since the first wave. The segment showed resilience again in June, with exports rising an annualized 14% since June 2019. This was the biggest increase in two and a half years, pushed by demand from fast-recovering advanced economies. Yet, India’s export growth pales when compared to other emerging market peers. Worryingly, outbound shipments in labour-intensive sectors posted their 19th decline in 20 months, showing continued stress in the labour market.

The ease of living segment stands all red for the third straight month. Inflation showed little sign of a let-up, staying above the Reserve Bank of India’s upper tolerance limit. High input prices, global commodity inflation, and rising crude prices are all either showing up in retail prices, or are likely to do so soon. Factory-gate inflation is already high, and several sectors are passing on their costs to consumers. Such pressures could curb any “meaningful softening" in core inflation, which excludes prices of volatile items such as food and fuel, this year, said ICICI Securities in a note to clients on 13 July. Analysts expect an upward revision to inflation projections by the RBI when it discusses monetary policy next week.

Rural wage growth declined 1.2% in real terms over the two-year-ago period, indicating the stress on incomes and consumption could linger for some time. The labour force participation rate, as measured in a survey by the Centre for Monitoring Indian Economy, dipped below 40% for the first time since May 2020.

The data available so far suggests that the second wave hit is behind us but it may take time for the scars to heal fully. Unless jobs and incomes recover to pre-covid levels, the rebound in economic activity may peter out.

How fast India can ramp up its vaccination program will be key to a sustained revival. After a pick-up in end-June, progress on that front doesn’t seem promising.

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