Restarting the growth engine

Restarting is easy but a full-speed drive is still some time away

Long before pandemics and lockdowns became the new normal, there was an old joke that god created economists to make weather forecasters look good. The transition from prioritising life (lockdown) to prioritising livelihood (unlocking) has been a messy one for India.

First, the lockdown restrictions for the most part have been far from homogenous with the definition of unlocking varying wildly across geography. Second, factories, warehouses, suppliers and customers are currently dispersed over a national collage of red, orange, and green zones implying that demand and supply lines remain frayed. Third, the mass exodus of migrant labourers to rural areas could be a sign that even if there were no lockdown restrictions, the return to pre-pandemic capacities is likely to be a struggle.

In sum, this makes for a highly complex macroeconomic assessment as the ground realities continue to rapidly evolve almost daily. There are two pertinent questions: One, how much of the capacity that was lost due to the lockdown has actually come back into production; and two, at what pace is economic activity recovering.

To address the first question, we estimate a "Normalisation Index" across key sectors of the economy, essentially inspired from the concept of capacity utilisation for industries, which compares current operative capacity with peak capacity. Using a simplified version of the "Wharton Measure of Capacity Utilization", we consider historical data on a wide range of economic indicators to estimate "peak output" performance in the run-up to the pandemic. We then calculate the "Normalisation Index" by determining how much the seasonally adjusted output for each indicator in each month varies from this peak output.

Illustration: Binay Sinha

 

We find that on the demand side, consumption indicators have inched up from a low of 14.5 per cent in April to 33.3 per cent in May. Our investment proxies stood at 27.3 per cent of peak capacity in April, while for the external sector, it is up from 25.7 per cent to 59.5 per cent in May. On the supply side, we estimate that for the industrial sector, the Normalisation Index, which dropped from 81.3 per cent in March to 43.9 per cent in April, is now on track to rise to slightly over 70 per cent in May. In contrast, the services sector recovery has been glacial and remains at around 7 per cent in May versus our estimate of 81.4 per cent in February. Overall, we estimate that activity normalisation is occurring faster in our measure of aggregate supply, while aggregate demand is seen to be lagging.

In itself, our findings are not surprising. Pandemics often create fear psychosis, which first rushes to affect consumption on the demand side, and services on the supply side.

Industries typically have more localised operations than, for example, malls or cab services, where the interaction with the public is far more intensive. The faster recovery in supply-side indicators over demand side is also intuitive, in our opinion, in that, while the former are largely contingent on the state of administrative constraints, the demand-side recovery will ultimately depend on the less straightforward issue of consumer sentiment revival.

Having established the operating capacity of the economy, we move to the second question, that is, gleaning the pace at which activity is recovering. To ascertain a more real-time capture of trends, we move from our "usual" monthly indicators — the latest of which are available only for May — and instead consider "very high" frequency indicators like app-based information of mobility and employment surveys that are widely available daily or weekly. We then consolidate the information in all these disparate indicators and combine it into a single index that captures the cumulative pace of economic recovery underway, that is, the Nomura India Business Resumption Index (NIBRI).

To construct the NIBRI, we use Google’s daily community data on mobility around the workplace and retail and recreation spots, Apple Map’s index for driving mobility, weekly surveys on labour participation rate, and seasonally adjusted trends in weekly electricity demand.

Standardising the index to a base of 100 for end-February, pre-pandemic, we find that activity had dropped around 56 percentage points (pp) to a low of 44.4 by end-April. As the lockdowns were relaxed, the NIBRI recovered to close to 70 by end-June. More recently, our weekly activity tracker fell for the first time on a week-on-week basis to 69.2 for the week ending July 5, and has started to plateau roughly 30pp below "normal" levels.

India’s Covid-19 curve had struggled to flatten during the lockdown, and the curve typically gets more unwieldy in the unlocking stage. Hence, while the initial spurt in activity was widely expected, as cases escalate, it can start to affect activity. Recent evidence of plateauing mobility trends suggests that the pandemic curve maybe starting to flatten the mobility curve. This possibly reflects increasing risk aversion, both among state governments and the public at large. If the sluggishness in mobility starts getting reflected in other growth indicators, it will signal a slippery road back to "normal".

How normal will this "normal" be is also a matter of concern. Herein, it is important to not miss the forest for the trees. Unlocking the economy will bring with it pent-up demand, which the economy is currently witnessing. It, however, does not simply wish away the fact that the health crisis remains a challenge, that the cash component of the government’s fiscal support package remains conservative at less than 1 per cent of GDP, and there is probably going to be an inevitable amplification of balance sheet problems for corporates, banks, shadow banks, and potentially households.

All in all, the April-June quarter is likely to be a washout — with GDP growth likely plummeting to -15.2 per cent year-on-year. Subsequently, we expect GDP growth to wallow in the negative territory for the next three quarters, averaging -6.1 per cent in FY21. Restarting is easy, a full-speed drive is still some time away.

Varma is chief economist for India and Asia ex-Japan at Nomura; Nandi is India economist at Nomura