A tentative recovery

Data suggests that the economy is bottoming out

A series of data releases from the government over recent days provides a clearer picture of how the Indian economy is recovering from the Covid-19 pandemic and the stringent nationwide lockdown that was announced in late March. The Markit manufacturing PMI provided some clear indications of hope in particular. The indicator rose to 47.2 in June, up from 30.8 in May and 27.4 in April. To be clear, this does not indicate that expansion is on the cards yet — anything under 50 is still contractionary. But it does suggest that more of those surveyed are expecting a recovery soon than in earlier months. It is worth noting that the PMI recovery in India is a little better than in many other economies — perhaps as a consequence of the economy’s minimal dependence upon trade-led demand and the news of a good monsoon. Other high-frequency indicators back up this notion — electricity demand, for example, is now at about 90 per cent of the expected level and rail tonnage is down only 6 per cent compared to the previous year, after being down a third in April. 

The story that the economy is slowly recovering from the lows of April is also borne out by the index of eight core industries announced this week, which contracted by 23.4 per cent in May as opposed to a 37 per cent contraction in April, year-on-year. Goods and services tax collections are also returning to more regular levels and indeed some officials are hopeful they will spike as backed up returns are filed on the new, relaxed schedule announced early in the lockdown. GST collections were just Rs 32,000 crore in April and went up to Rs 62,000 crore in May — but now, in June, the numbers are back above Rs 90,000 crore, only about 9 per cent lower than the equivalent figure for last year. It is possible that this itself is the new normal — The Economist recently wondered whether the world would have to content itself with “the 90-per-cent economy” during the course of the pandemic. That said, the revenue crunch at a time of increased calls on the government’s purse has led to troubling implications for the fisc. Almost 60 per cent of the fiscal deficit target for the entire year of 2020-21 was used up in just the first two months, April and May. The prime minister has noted that many welfare measures, such as the enhanced foodgrain allowances, will remain in place till the festive season. While the government is to be commended for keeping the fiscal impact of its relief measures and stimulus within sensible levels, the revenue crunch will nevertheless hit the deficit numbers, and many analysts expect a significant slippage from the target. 

There is, however, some safety visible on the external account. For the first time since the global financial crisis of 2008, India saw a current account surplus in the January-March quarter, albeit small. This is a reflection perhaps of tentative demand in the period, given that the most influential component of this swing to a surplus was a sharp fall in merchandise imports. The rupee has been trending downwards towards a more competitive value, and the central bank has built up reserves to a comfortable level. The external account thus gives the government some breathing room to focus on the internal challenges.