Even before a second Covid-19 wave threatened to play spoilsport, the demand in the economy was muted and Corporate India was struggling to retain the pricing power gained in a short period of fast-paced normalisation. Latest streams of high-frequency data signal GDP might contract at a rate sharper than 1.1% prognosticated by the National Statistical Office (NSO) in the March quarter. Lockdowns are back in a localised fashion and night curfews are being imposed in several urban areas, hitting mobility and raising the grim prospect of a further weakening of consumption demand.
Just before the second Covid wave hit the country, sections of Corporate India was going through a reset phase, which inflated raw material costs and core (non-oil, non-gold) imports. Corporate profitability is likely to be under greater pressure in Q4. Firms could defer their plans to increase capacity utilisation and roll out new investment/business decisions by another quarter, if not longer, due to the renewed uncertainties. Nomura India Business Resumption Index declined in recent weeks.
Underlying inflation is picking up — Retail inflation hit 5.03% in February from a 16-month low of 4.06% in the previous month, wholesale price inflation, too, spiked to a 27-month high of 4.17% in February. What could add to the inflation pressures is a rise in oil prices.
As per the index of industrial production, capital goods production shrank a steep 9.6% in January, reflecting that large companies with potential to invest and give the much-needed impetus to fixed asset creation in the economy, are yet to take the plunge. Equally disconcerting is 6.8% annual contraction in the production volume of even consumer non-durables in January; clearly the lower middle-class and the poor are wary of spending on even essentials.
Overall industrial output contracted in January by 1.6% against a 1.6% rise in December. The output of the eight key infrastructure industries, with a near 40% share in the index of industrial production, remains subdued, too. After a 0.6% rise in September, it slid at a faster pace of 0.9% in October and 2.6% in November before inching up marginally by 0.2% in December and 0.1% in January.
Growth in merchandise exports slowed to 0.7% on year in February from a 22-month peak of 6.2% in January. Core imports, which is an indicator of investment demand, grew 9.5% in December and 8.4% in January, indicating companies had indeed planned to reboot, but the growth fell to 6.5% in February.
Demand from the lower middle class, rural India and small towns turned weaker in recent months — two-wheeler sales, a close proxy of such demand, fell 8.8% on year in January and a steeper 16.1% in February, after 11.9% rise in December, the only month in the fiscal where the sales of these vehicles showed positive growth.