A few indicators of economic activity had looked up in May, as India began to reopen for business after a prolonged covid lockdown, but since then, this incipient recovery appears to have lost momentum. Key aspects of the prevailing gloom are captured by the latest update of the Mint Macro Tracker published in this newspaper on Wednesday. Of the 16 big variables under its watch, 12 were in the red—that is, doing worse than their five-year average performance. While tractor sales bounced up in June, consumption measures such as sales of passenger vehicles and air tickets showed a crash. Industrial production, non-food bank credit, rail freight traffic and core infrastructure growth clawed back in May and June from earlier depths, but not enough to return to their pre-covid trends. If the external sector had better numbers, it was because foreign reserves stayed high and imports shrunk even more than exports, resulting in a positive trade balance for a change. The broad picture is not just dismal, it seems to confirm what was feared in April—that a revival would not be a simple matter of unlocking our economy. Ravaged by an abrupt halt of commerce and wracked by uncertainty, it needs more than just a simple restoration of supply. Demand matters, too, and it looks too weak to get back up on its own.
Unfortunately, July figures may not be much better than June’s. The question of a post-lockdown rebound in growth was always based on hope more than a realistic assessment of this crisis. It is not just a failure to contain the spread of coronavirus that has resulted in output forecasts for 2020-21 getting grimmer. Some analysts now expect our gross domestic product to contract by even more than 5%, with the second half of the year showing only mild improvement over the first. Off-and-on curbs on business operations have played a role in this, with a patchwork of intermittent lockdowns under local authorities bringing back memories of our permit raj days, when petty officials would encash their power to badger private producers. But a bigger reason for the economy’s dim outlook is compressed expenditure by private agents, the classic cause of a deep recession. Yes, it is true that our rural sector has not been as badly hit as the rest of India. It is also undeniable that some retail investors appear gung-ho on stock market speculation. Yet, as things stand, the impulse to spend rather than conserve cash is unlikely to stage a sudden comeback even if a vaccine were to overcome health anxieties.
So far, the Centre has been signalling a need to abide by pre-covid fiscal restraints, hinting of stimulus measures aimed at demand only later, once the pandemic is past its peak. This frame of analysis adheres too strongly to the notion that it is always unwise for a government to spend beyond its means. It also seems to assume that the economy will get going by itself after covid-19 recedes as a scare. Further, it seems to ignore its underlying weaknesses. These were visible in flagging sales in various sectors even before the virus showed up, possibly an outcome of sclerotic investment. The relief package unveiled by the government in May seems too reliant on credit disbursals to prove very effective. It is time to spur demand directly, lest revenue collections drop even more, making a worrisome situation worse.