As the lockdowns persist and get stricter in some places, the fall in activity is likely to persist. Image: Reuters]
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The COVID-19 second wave is pushing the economy towards the doldrums.
Our economic recovery tracker is flashing red. Unemployment has risen to 14.45 percent, the worst reading since June 2020. Consumer sentiment dipped for the fifth straight week as people stay cooped up at homes to avoid contracting the infection.
Nomura’s proprietary India Business Resumption Index shows pretty much the same thing. It shows economic activity to be 38 percentage points below the pre-pandemic level, something last seen in June 2020.
As the lockdowns persist and get stricter in some places, the fall in activity is likely to persist. Already, e-way bill generation in the first half of May has fallen to a one-year low. This, of course, also has implications on the government’s revenue collection through the Goods and Services Tax.
Morale is down and people are dipping into their savings to tide over the pandemic. In the last 13 months, for instance, at least 35 million salaried workers withdrew money from their provident fund (PF) accounts. The impact on the informal sector is likely to be far more.
In its latest state of the economy report, the Reserve Bank of India has sobered down after its exultant assessment a month ago. It has warned of a demand shock and has hinted that we should ignore its GDP projections for the first quarter of the current financial year.
Although it does conclude that the loss of momentum in the economy will be less severe than during the first wave, the central bank also cautions that this is an ‘extremely tentative’ diagnosis.
While it has also hinted at policy interventions and being re-armed and re-loaded, rising inflation will be hard to ignore. Wholesale price inflation for April came in at a decadal high as commodity prices continue to rise. A lot depends on how much it will feed into consumer price inflation.
Historically, a 1 percentage point change in WPI non-food manufactured products inflation leads to a 20 basis points change in CPI core goods inflation, according to Emkay Research. That also means that the passthrough will be lower for overall CPI core inflation (since it includes services) and even lower for the headline CPI number. But this passthrough effect is also “time varying and depends on output gap (which will likely widen in the current quarter),” the brokerage warned.
For now, RBI is likely to take the same stance as developed market central banks and say that rising inflation is transient. Thus there is unlikely to be any change to the accommodative stance. While that is necessary, it may not be sufficient to lift the hardest hit sectors of the economy.
Stay safe and check out these reports from our independent equity research team:
Federal Bank – The cheapest for the quality it offers
Gland Pharma: Vaccine opportunity to facilitate foray into biosimilars
Does the rally in Hyderabad Industries have more legs?
Colgate-Palmolive is a defensive bet at reasonable valuation
What else are we reading?
Cairn’s belligerence puts Indian government in a quandary
The diverging outlook for India and global agriculture markets
How to meet the environmental challenge facing India’s cities
How WarnerMedia and Discovery plan to forge a media behemoth (Republished from the FT)
Our chartists’ technical calls for the day (Please note these calls are published before the markets open on trading days): Adani Enterprises, M&M Financial, Tata Motors, and GoldBeES
Ravi KrishnanMoneycontrol Pro