India shows early signs of an economic recovery

New PMI data lifts optimism but economists call for new fiscal stimulus fearing a second wave of Covid-19

Authorities in India have been steadily lifting strict Covid-19 restrictions to restore livelihoods and spur economic activity. AFP

India's economy is showing signs of recovery following a punishing Covid-19 lockdown, according to recent data releases. But analysts warn that Asia's third-largest economy is not yet out of the woods, citing concerns about the sustainability of an economic recovery if a second wave of the coronavirus hits and the need for more fiscal stimulus.

“With the onset of the festival season and opening of the lockdown, in most of the areas there is recovery,” says Anil Bhansali, head of treasury at Mumbai-based consultancy Finrex Treasury Advisors. “But its sustainability will depend on how we perceive the second wave of Covid-19 and, like European nations, will we be required to go for a second lockdown?”

A key indicator that India's economy is recovering emerged on November 2 with the release of the October IHS Markit manufacturing Purchasing Managers' Index (PMI) data, which surged to its highest reading in more than a decade to 58.9. The index is a gauge of economic health, with a reading above the neutral 50 mark indicating expansion, while a reading below points to contraction.

“Confidence towards the year-ahead outlook for production improved as firms hoped that fewer Covid-19 cases and the reopening of other businesses could boost output growth,” Pollyanna De Lima, economics associate director at IHS Markit, says.

Ms De Lima adds that companies are “convinced that the resurgence in sales will be sustained in coming months”, signalled by firms stocking up on materials for their factories.

The number of daily Covid-19 cases in India has fallen to about half of their September peak, according to India's Ministry of Health and Family Welfare. On Saturday, the ministry reported 50,356 new Covid-19 infections in the past 24 hours, taking its total to more than 8.46 million cases. India has the second-highest number of coronavirus cases in the world after the United States.

India's economy was badly hit by one of the world's strictest nationwide lockdowns, which was enforced by the Indian government in March amid fears about Covid-19 and the strain it would put on its already overstretched public healthcare system.

The lockdown forced many businesses to cease operations and left millions without work. As a result, the country's second quarter gross domestic product contracted by a staggering 23.9 per cent year-on-year, official data showed.

In recent months, authorities have been steadily lifting restrictions in an effort to restore livelihoods and spur economic activity, although it is still a long way off returning to pre-Covid levels, business leaders say.

“The Indian economy is showing signs of growth, but the pace is slow as we continue dealing with the challenges brought by the pandemic,” Diwakar Nigam, managing director of Delhi-based Newgen Software, says.

However, the Indian government has expressed optimism about the economy.
During a virtual press briefing on Wednesday, Prakash Javadekar, India's Information and Broadcasting Minister,  said the economy was bouncing back at a faster than expected pace, saying there had been a surge in tax collections in October, growth in digital payments, a rise in demand for power, and an increase in foreign direct investment (FDI).

Official figures reveal that FDI into India reached more than $35 billion from the April to August period – a record high for the first five months of the financial year.

The latest PMI data for the services sector also rose in October to a reading of 54.1, ending seven months of contraction.

“It is very clear that the economy is coming back on track despite the pandemic,” Mr Javadekar said.

But economists are sounding a note of caution.

“The worst is definitely behind us,” says Sujan Hajra, chief economist at Anand Rathi. “There's little doubt that there's a broad-based recovery. But can India continue doing that? My sense is that with very little fiscal stimulus, the progress from here can become pretty slow.”

India also remains vulnerable to the risks posed by global trends and trade flows, which is “a concern for any country”, says Mr Hajra. India stands to benefit from lower oil prices amid weakness in the global economy as it is a major importer of oil, he adds.

However, Mr Hajra says India's economy is “not out of the woods yet” and fiscal stimulus is the “need of the hour”.

Mr Bhansali agrees that the “government not giving sufficient stimulus packages or being slow could affect demand and recovery”.

It is essential “to ensure timely stimulus for the country and [address the] liquidity issues of medium, small and micro businesses, and labour issues, so that the demand continues to rise”, Mr Bhansali says.

“Growth conditions have to be created, as private investment will not come at this moment.”

He says that there has to be more public investment “to revive manufacturing and growth ... and ensure that consumption, investment and exports increase so that demand is sustained”.

India in May announced a $260bn rescue package, but its focus on credit schemes and long-term measures left many business owners complaining that there was not enough in terms of direct cash benefits to help struggling firms or put cash in the hands of consumers to boost demand.

But with India's festival season under way – peaking with Diwali on November 14, a time when people traditionally make big purchases and travel to meet family – the government expects spending to pick up.

“With the onset of the festive season, overall consumption is expected to see further uptick in the coming months, enhancing prospects of faster economic normalisation,” according to the latest monthly report on the economy by the Department of Economic Affairs.

But there are widespread concerns that an increase in travel and people celebrating during the festival period will cause the number of Covid-19 infections to rise – particularly as they become more relaxed about following precautions such as wearing masks and following social distancing practices.

The report says the country is poised “to recover at a fast pace and reach pre-Covid levels by the end of the year – barring the incidence of a second wave that may be triggered by the fatigue with social distancing”.

“A steady contraction of active Covid-19 cases and a low-case fatality rate has instilled measured optimism in India that the worst is behind us,” the report says. “At the same time, a second wave of the pandemic in advanced nations is a grim reminder of how reality hits back when caution is compromised.”

Srividya Kannan, founder and director of Bangalore-based consultancy Avaali Solutions, says the economy seems to be on a trajectory towards growth, helped by the festive season. But she remains cautious about the outlook and whether spending will materialise to the extent that many are hoping because a number of people have taken salary cuts amid the crisis and unemployment levels remain uncomfortably high.

“Even as the mood continues to be upbeat, it still remains to be seen how sustainable the demand growth will be,” Ms Kannan says. “Since the experience of this pandemic, job losses and living on borrowings, people are very sensitive towards spend, especially on non-essentials.”

If Covid-19 cases surge again in India and the country is forced to reintroduce restrictions, recent gains in the economy could be wiped out all too rapidly, she adds.

“To sustain a recovery, it is imperative to prevent any possibility of the second wave of the lockdown,” she says.