Economic activity tentatively returning to pre-Covid levels, says Icra

Economic activity recorded a broad-based improvement in December as against November, showing a return of demand, according to a report.

Rating agency Icra on Monday said most of the indicators have displayed a year-on-year (y-o-y) expansion in December 2020, which signals a "tentative return to pre-COVID normalcy".

It can be noted that there have been apprehensions about the sustainability of the demand after a pick-up in economic activity during the festivities. December was the first month after the busy activity season.

"Economic activity rebounded solidly in December 2020 relative to the previous month, reflecting a pick-up in demand after the temporary post-festive slack and year-end discounts," the agency's principal economist Aditi Nayar said.

The waning of the unfavourable base effect related to fewer working days in November 2020 contributed to the improvement in December 2020, she said, adding a pick-up in the generation of GST e-way bills, and the considerable expansion in rail freight traffic, offer encouraging signals of the pace of revival in economic activity".

As many as 12 of the 15 high-frequency indicators tracked by the agency recorded an improved year-on-year performance in December 2020, relative to November 2020, including electricity generation, the output of passenger vehicles (PVs), motorcycles, vehicle registrations, and fuel consumption, it said.

The year-on-year growth in the generation of GST e-way bills nearly doubled to a robust 15.9 per cent in December 2020 from 8.1 per cent in the previous month, with a distinct pick-up in the second half of the former, it pointed out, adding the robust performance of e-way bills in December 2020 suggests that the GST collections will remain healthy in January as well.

Nayar said except for scooter production, diesel consumption and domestic airlines' passenger traffic, 12 indicators showed a positive surge in activity, albeit at a varying pace.

Acknowledging that the low base may be helpful on this, she said, "it does signal a tentative return to pre-COVID normalcy, in our view".

Regardless of the monthly volatility and uneven performance across the sectors, there was a widespread recovery in volumes in the third quarter of the financial year 2021 relative to the preceding second quarter, she said.

While this augurs well for the upcoming GDP print for the third quarter of financial year 2021, rising raw material and wage costs have partly offset the positive impact of rising volumes on profitability in some non-agricultural sectors, she said, adding that for now, the agency is maintaining its 1 per cent of the third quarter GDP contraction estimate.