Expectations rose on Wednesday that manufacturing activity in India would soon return to its pre-lockdown levels. The principal reason was the release of data by IHS Markit, a private tracker of commercial orders, that showed its Purchasing Managers’ Index (PMI) for the sector at 47.2 in June. Given the lows to which it had sunk, this was impressive indeed—well above the 30.8 recorded in May, and within sniffing distance of the 50-mark that separates contraction from expansion. The Centre’s unlocking guidelines for the current month may not differ much from June’s, but an uptick in business confidence reflected in the index raises hopes of a positive reading in July. The PMI’s last expansion was in March, after which it tumbled to 27.4 in April amid a shutdown of all factories. Sighs of relief were also evoked on Wednesday by data released by the government on its collections of goods and service tax (GST). In June, it drew about ₹91,000 crore into its coffers, up from roughly ₹62,000 crore in May and some ₹32,300 crore in April. Unemployment, which had spiked three months ago, has also returned to a less unbearable level. Sectoral numbers are showing signs of recovery. The worst, we could say, is now behind us.
Yet, we must temper optimism with caution. India still has a long way to go. There is no precedent on record of an economy being held in suspended animation for over two months, and a recovery is not an open-and-shut case of inevitability. For one, we must remember that Indian output was decelerating even before covid-19 struck and prompted restrictions on the movement of goods and people to contain infections. The factors that had led to that slowdown, traced back to 2017-18, or even late 2016, were largely unresolved when we went into our lockdown. Consumption had begun to follow an earlier downtrend in investment, external trade was sputtering, banks had a pile-up of bad debt, advances of credit were trailing off, and government outlays bore a heavier growth burden than in previous years. All these underlying conditions appear to have worsened since the covid outbreak.
Given the severity of the pandemic’s impact on jobs, household incomes and demand, an economic recovery is likely to be a long wait. Various forecasters see the country’s gross domestic product contracting this fiscal year. The latest PMI data could well be indicative of a momentary burst of business orders after India’s curbs were lifted: a sudden rush, as it were, to fill a vacuum caused by the lockdown. Inventories were drawn down over April and May, supply shortages were reported in various sectors, and the fulfilment of pent-up demand would have been enough to get conveyor belts rolling furiously in June. Whether such brisk business can be sustained once the vacuum effect exhausts itself, however, remains highly uncertain. The pandemic has not peaked yet and the country’s measures to support overall demand look inadequate. Supply-side solutions may work to some extent—after all, Say’s Law of supply creating its own demand is not pointless—but the characteristics of our current crisis are such that it’s demand that needs support. Uncertainty has held back both investment and consumption. Spending appears to have slumped. The government is the only economic agent that has the ability to step into the breach. Immediate food relief for the poor was a priority. Having addressed hunger, it’s time to revitalise demand and spur investment. Yes, we need an entirely new budget for 2020-21.