In early June, the Reserve Bank of India (RBI) had projected that the Indian economy will grow at 18.5 per cent in the first quarter (April-June) of the current financial year. Growth for the full year was pegged at 9.5 per cent. But an analysis by economists at the RBI now suggests that the economy is likely to have fared better than previously expected. Several indicators seem to be indicating a faster recovery from the lows observed during the peak of the second wave as states lifted restrictions with the second wave showing signs of ebbing. Growth is now expected to touch 22.1 per cent in the first quarter, which would imply that the economic fallout of the devastating second wave of the pandemic might not have been as dreadful as last year.
On the demand side, as the restrictions imposed on activities began to ease, and the vaccination drive picked up, mobility indicators began to register an uptick, and aggregate demand began to recover. As the RBI study notes, “average daily e-way bill collections improved substantially from June 20, reflecting the underlying improvement in economic activity”. Automobile sales have registered an uptick, as have tractor and two-wheeler sales, indicators of rural demand. Fuel and power consumption also seems to be picking up pace. Data from CMIE indicates that unemployment has fallen. On the supply side, though, the incipient recovery in manufacturing and services was cut short by the second wave. As the RBI notes, the manufacturing purchasing managers index (PMI) fell to 48.1 in June — the first contraction in the last 11 months. Similarly, the service PMI also declined to 41.2 in June. However, the Nomura India Business Resumption Index rose to 95.7 for the week ending July 11 — it is now back to levels seen prior to the second wave of infections, and only 4.3 percentage points below the pre-pandemic level.
Yet, there continues to be cause for concern. The disruption in activities due to the second wave, while less severe than before, has interrupted a nascent recovery, leading to a sequential contraction in the April-June quarter of the current financial year. Even if the economy grows at 22.1 per cent in the first quarter — the higher of the two forecasts — it will be considerably lower than the levels observed in the fourth quarter of the last financial year (January-March 2020-21), as well as levels seen in the first quarter in 2019-20. As rating agency ICRA notes, volumes of most non-financial indicators in June are lower than levels observed in April, and even in June 2019. In its report, the RBI also sounds a note of caution, pointing out that “the economy is struggling to regain the momentum of recovery that had started in the second half of 2020-21”, and that “a solid increase in aggregate demand is yet to take shape”.