Covid-19: Decoding the nature of the economic recovery

A collection of excessive frequency indicators has pointed to a rising momentum within the Indian economic system. How far this has helped the economic system make up for the sharp fall from pre-pandemic ranges will turn out to be clear solely when the second quarter (July-September) GDP figures are launched later this month. When disruptions as large as the present one hit an economic system as complicated as India’s, development charges are usually not the one factor affected. An equally vital parameter to trace is earnings distribution, which has its personal impact on the economic system’s development trajectory. While the Indian economic system doesn’t provide a lot when it comes to high-frequency knowledge to analyse such modifications, it’s more and more turning into clear the present financial restoration may not be primarily based on a really broad base. Here’s why:

1. Households in India saved extra throughout the lockdown

Last week, the Reserve Bank of India launched provisional estimates of family financial savings for the primary quarter (April-June) of the present fiscal yr. As a share of GDP, family financial savings have been 20.1% within the quarter ending June 30. This quantity was 10% in March and seven.8% in June 2019. In absolute phrases, family financial savings elevated from Rs 3.84 lakh crore within the quarter ending June 2019 to Rs 8.15 lakh crore in June this yr. The enhance on this savings-GDP ratio is larger than the rise in absolute financial savings. This is as a result of the denominator (GDP) itself suffered an enormous fall – it contracted by 24% on an annual foundation – within the June 2020 quarter.

 

Also Read| Covid-19: What you should know at present

2. Did India see a paradox of thrift within the first quarter?

The time period paradox of thrift owes its recognition to John Maynard Keynes who argued that if individuals attempt to save extra throughout a recession, it should ultimately find yourself hurting the economic system quite than serving to it. This is as a result of a rise in (precautionary) financial savings results in a fall in consumption and due to this fact combination demand or earnings. The financial logic of this isn’t very obscure. If the extra financial savings of Rs 100 substituted the cash spent on consuming out, then the individuals working within the restaurant lose out on incomes. This results in the restaurant employees chopping down on their purchases, say new garments for his or her youngsters. This triggers a vicious cycle of kinds. The Covid-19 pandemic has added one other layer to this — compelled financial savings. This is as a result of social distancing necessities stopped lots of people from enterprise spending reminiscent of consuming out, travelling or taking holidays, even when they needed to. The fall in PFCE greater than compensated for the rise in family financial savings within the quarter ending June 30. While issues would have improved after the June quarter — a lot of April and May was in an virtually full lockdown — the magnitude of this enchancment will solely be identified as soon as we have now extra knowledge.

 

3. Rising meals inflation’s impression on poor households

Retail inflation, particularly the meals element of it, has been very excessive up to now one yr. Food inflation has been rising in double digits within the months of September and October. The proven fact that this comes on an already excessive base — meals inflation grew at 5.1% and seven.9% in September and October final yr — implies that absolute costs are actually excessive. Food gadgets have a weight of 39% (47% in rural areas and 30% in city areas) within the common CPI (shopper worth index) basket. As is to be anticipated, meals gadgets have a a lot larger weight in consumption spending of poor households. According to the 2011-12 Consumption Expenditure Survey of the National Sample Survey Office — these are the most recent accessible figures — the underside 50% of family spent greater than half their consumption expenditure on meals. At a time when pandemic-related headwinds to earnings and employment proceed to persist, the sharp rise in meals costs should have created an enormous squeeze on non-food spending by poor households.

 

4. Stocks rally pushed by an ‘investment of last resort’?

India’s benchmark fairness index, the BSE Sensex reached an all-time excessive on November 18. That this has occurred isn’t a surprise. The inventory market has proven what’s known as a V-shaped restoration after falling briefly within the preliminary section of the lockdown. This is although most institutional forecasts have predicted a double-digit contraction for the Indian economic system within the present monetary yr. What explains this? A have a look at probably the most primary indicators of inventory market efficiency, the worth to earnings or PE a number of, means that the present inventory market rally isn’t backed by goal efficiency. The PE a number of measures worth of a share to earnings per share. This a number of has elevated quickly after the lockdown, underlining the speculative nature of the present growth. This, when learn with the truth that the remainder of the economic system doesn’t have many funding alternatives to supply might additionally imply that it has been appearing as “an investment of last resort” of kinds for individuals with a glut of financial savings. An economic system the place the comparatively poor have misplaced incomes and jobs, are having to spend extra on shopping for meals, and the place the wealthy are going through a financial savings glut as a result of they can not spend even when they need to and are maybe due to this fact investing in shares presents a blended image.