India is now firmly in the grip of a severe second Covid-19 wave and while it may not have as deleterious as impact as the first one, the local restrictions will undoubtedly slow what was a promising recovery.
Much of the damage has taken place in the services sector, and in the informal space, and therefore, doesn’t really show up in high frequency indicators. But even formal sector data isn’t encouraging and there are clear signs of a slowdown that could get exacerbated as the vaccination drive loses momentum and infections surge.
Manufacturing remains weak, private sector investments show no sign of picking up meaningfully and loan growth is sluggish even though input costs have risen. The sectors that are the most vulnerable to disruption — hospitality and transportation services — may contribute less than 6% to GDP, but they account for a disproportionately high number of jobs.
The revival in the services sector could now be postponed to the end of 2021.
Indeed, headline GDP numbers are now becoming less relevant because these reflect primarily the performance of the organized sector; GVA (Ebitda + wages) of listed companies grew by about 6.5%, for the nine months to December 2020 while India’s non-agri GVA fell 11.6%, evidence of larger companies are gaining market share and rationalising costs. Companies are reporting higher profits and this is driving up corporate tax collections.
But this too could lose steam. Motilal Oswal’s real gross value-added index posted a growth of just 0.5% y-o-y in February, the weakest in the past six months as against + 4% in January. The slower growth was largely driven by the non-farm sector, with industrial activity posting its first fall in six months and the services sector growing just 0.5%. The road to recovery is a long one.