Covid-19 crisis: Now, FinMin is not so sure about a V-shaped recovery

Officials say people spending less owing to uncertainty

The finance ministry is reassessing its earlier optimism about a V-shaped economic recovery as people are spending less owing to extreme uncertainty induced by the Covid-19 pandemic.

“We keep devising projections based on high-frequency indicators. The progress seems gradual, and not necessarily it would follow our previous assessment of growth trajectory,” a senior ministry official told Business Standard.

The finance ministry in its monthly economic review last month had said the country was witnessing a V-shaped recovery, and attributed the steep 23.9 per cent contraction of the economy in the April-June quarter to the stringent coronavirus lockdown.

Most ratings agencies and organisations have revised further downwards their projections for India’s gross domestic product (GDP) for 2020-21 since the government released the data for the first quarter, which showed the biggest contraction on record.

The official said the August pattern was based on indicators such as automobile and tractor sales and e-way bills, which had witnessed better performance and growth after the Unlock process was announced.

However, spending continues to be less as people who are getting direct benefits from the government are choosing to save in the current situation. “As part of the (Covid) stimulus package, the government has transferred a significant chunk of cash, but that has not been spent by the beneficiaries. This shows people are more focussed on saving due to uncertainties," the official said.

On the second round of stimulus package, he said work was in progress and inputs had been sought from all the departments. Without divulging the details of the new stimulus, the senior bureaucrat said the government was waiting for Covid-related health concerns to abate first.

The first round of fiscal stimulus included measures like extra spends of at most Rs 2 trillion, constituting just 1 per cent of the GDP.

Among the major economies, India witnessed the steepest decline in GDP growth in the April-June quarter following the outbreak of the pandemic. However, some of the sectors pointed to a recovery in activity.

As to why did the ministry emphasise on a V-shaped recovery, another finance ministry official said, “When you look at indicators such as e-way bills, power consumption, cement, steel consumptions, railways freight, all these, after the decline in the months of April and May, have recovered to 85 to 95 per cent levels. If you look at high-frequency indicators, there is a recovery happening. And what is V? It is basically a decline and then a recovery. At the same time, it is happening in the manufacturing sector and not yet in the service sector.”

Striking a different note from the finance ministry's then stance, Reserve Bank of India Governor Shaktikanta Das had said economic recovery was likely to be gradual, as the uptick seen in some sectors in June-July appeared to have levelled off.