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India’s hopes of a smooth return to pre-pandemic levels of economic output got severely derailed in May as most states imposed lockdowns to fight the second covid-19 wave. As many as 12 of 16 high-frequency indicators considered in Mint’s macro tracker were in the red, or below their five-year average trend, in May.

The last time the tracker gave a worse reading was in April 2020, when 13 indicators fell into red due to the first nationwide lockdown. 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 poor showing in April 2020, India saw gradual improvement, especially in the consumer and producer economy segments, as the first wave of the pandemic subsided. By March 2021, only seven indicators were in red, but the threat of the second wave had arrived. Since then, not only has the consumer segment reversed its gains, inflation, too, has clawed its way back up amidst rising unemployment, raising the unpleasant spectre of stagflation.

The vaccination drive also slowed down drastically last month as supplies choked. Fortunately, most indicators show the May trough was not as bad as seen in the first wave, which was marked by stricter and pervasive lockdowns, disrupted supply chains, and greater dislocation of the poor.

In a report sent to clients on 23 June, Moody’s Investor Service noted that this year’s lockdowns had mainly affected aggregate demand in contrast to 2020 when they had also constrained supply. This could jumpstart recovery soon enough, but the pace will depend on the vaccination drive and the revival of private consumption, the credit rating agency said. Most high-frequency indicators have already been recovering in June with lockdowns rules getting relaxed, and a more promising vaccination policy suggests the pick-up could gather steam in the weeks ahead.

Consumption Hit

In May, all four indicators in the consumer economy segment fell into red, with three performing their worst since May 2020. Tractor sales, which had been resilient after last year’s lockdown, saw their first decline in a year, reflecting the rural impact of the virus in the second wave. Passenger vehicle dispatches declined at an annualized rate of 48% over the two-year-ago period. Vehicle registrations, which bear a closer link with retail sales, also declined at a similar rate. However, two times as many vehicles were registered than the year-ago period, showing that the second wave impact was lesser than the first wave. On a sequential basis, passenger vehicle sales dropped 71%. Domestic airlines carried 2.1 million passengers in May, down 63% sequentially and 58% lower on an annualized basis over the two-year-ago period.

The tracker now considers annualized growth over the past two years because the unusual contraction in most high-frequency indicators last year makes year-on-year growth comparisons less useful.

The hard hit taken by the contact-intensive services sector dragged down the composite Purchasing Managers’ Index (PMI) to 48.1, the lowest since August 2020. This indicates a month-on-month contraction in production, halting a recovery that was progressing rapidly even in April. While robust export orders bailed out the manufacturing sector, services suffered from job losses, high costs, and weak demand.

Rail freight traffic rose marginally in May, suggesting that supply-side disruptions have been less severe this time. But the eight core infrastructure sectors recorded their first dip in output this year.

Incomes Choked

Over the last three months, exports have resisted the impact of the second wave as the world’s two largest economies, China and the US, continue to recover rapidly. India’s exports grew at a two-year annualized rate of 4%, and also rose sequentially. The exports rose despite a 1.7% rise in the rupee against the dollar, which was the best monthly showing for the Indian currency since September 2020. However, the recovery in exports in labour-intensive sectors in April proved to be temporary, suggesting that stress has returned in the labour market.

The ease of living segment of the tracker is bathed in red. Rural wages remain anaemic, and unemployment rose marginally in May to the highest in a year, shows data from the Centre for Monitoring Indian Economy. While some recovery is expected in June, the impact on incomes and consumption could linger.

The inflation threat is back after a brief lull. Retail inflation breached the Reserve Bank of India’s upper tolerance limit for the first time this year, riding on high fuel prices. Core inflation, which excludes fuel and food prices, has also edged higher, throwing the spotlight on the next monetary policy review of the central bank in August.

High global commodity prices, which have sharply pushed up wholesale inflation, could potentially transmit to the retail side soon, some economists argue. The threat of a ‘taper tantrum’ at a time when India’s public debt levels are at an unprecedented high pose another significant external risk in the months ahead.

On the home front, a lot will depend on whether India is able to keep cases under control and ramp up its vaccination pace. The efficacy of India’s pandemic containment efforts will determine the shape of the economic recovery in the months to come.

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