After putting up a brave face that the “economy was seeing green shoots”, it is good the Union government is now conceding the prospects of recovery in the near term as “fragile”. Striking a realistic note, the monthly report of the Department of Economic Affairs frankly admits that “the increase in Covid-19 cases and subsequent, intermittent lockdowns make the recovery process fragile.” The immediate learning: the pandemic is persistent; and that the revival of the economy is nowhere round the corner.
This reality is quite at variance with what many in government held out a few days and weeks ago. Prime Minister Narendra Modi, addressing foreign investors at the India Global Week 2020 in early July, was quite emphatic that the various reforms and the ‘green shoots of recovery’ provided attractive investment opportunities in India, especially in the sectors of defense and space.
Barely two weeks ago, at the ‘2020 India Ideas Summit’, Finance Minister Nirmala Sitharaman was even more upbeat in promising a speedy and sustainable recovery. “The green shoots are (visible) based on high-frequency indicators... we will watch them as we go along.” She listed the ‘green shoot’ indicators as the increase in electricity and fuel consumption, inter and intra-state movement of goods, PMI data and retail financial transactions that are picking up.
The virus's second wave
By last Saturday, Sitharaman had shifted her position. In an interaction with media, she sounded ambivalent. “As long as the pandemic is active, we are talking about a situation full of uncertainty,” she said. The finance ministry report, now realistically analyses that the coronavirus was more persistent than it was earlier thought. “India’s top 12 growth driving states account for 85 per cent of the Covid-19 case load, with 40 percent of the confirmed cases concentrated in the top 2 growth drivers, ie. Maharashtra and Tamil Nadu.” In a new resurgence of the virus in cities that had battled it earlier, and in new areas in the South and East of the country, India is now seeing the daily caseload of cases exceeding 60,000 per day.
This is the highest in the world, ahead of both the US and Brazil; though in number of total cases and deaths, we are still at No.3. This new resurgence of the virus has led to a fresh spate of lockdowns and curfews across cities and areas that had seemed to have emerged from the crisis. This ‘second wave’ had not been factored in by the authorities; and the new panic has now disrupted the rickety supply chains that were just about starting to function.
All the recent ‘high-frequency indicators’ point to not ‘green shoots’ but a still-born recovery. Analytics firm IHS Markit’s manufacturing data showed output in July contracted faster than in June. In particular, the Purchasing Manager’s Index (PMI) for manufacturing declined in July marginally to 46 compared to June’s 47.2. The below-50 figure indicates a contraction, while a score above 50 is a signal for expansion of the sector. It’s a “reacceleration of declines,” says Elliott Kerr, an economist with IHS Markit. The finance ministry report has also highlighted that despite the Reserve Bank pushing lending as an engine of growth, bank credit growth recorded a measly 0.4 per cent increase in the fortnight ending July 3, compared to the previous fortnight.”
Restoring supply lines
These are indicators that there is no quick fix and the recession is going to be prolonged. The RBI’s Monetary Policy Committee (MPC) said that the fall could be contained in the latter part of this financial year (FY21) if Covid-19 is arrested soon. Most economists who participated in a Reuters poll said the economy could contract by 20 per cent in the June quarter and remain in negative territory until the December quarter.
Where the government-both at the Centre and the states-can contribute to quickening the pace of opening the economy, but is not doing so, is in restoration of transport and logistics. How do manufacturing plants begin production without men and material? Anecdotal reporting shows there is a definite ‘reverse migration’ happening, where people who had fled to their villages, now want to return to their old jobs; but they can’t because rail and bus links continue to be paralyzed.
Construction firms in Kerala trying to get their old workers back from Bihar on private buses. It’s not working because authorities in Kerala, afraid of the virus, are denying permission for shipping workers by road. Mumbai’s offices cannot function without the local trains becoming operational, or Delhi without its Metro.
Lockdowns being re-imposed by state and municipal authorities cannot paralyze entire populations. They have to be limited to hotspots rather than close down entire swathes of the city or state. If the government does not step in to support transportation and supply lines, economic recovery may become an endless marathon.