Amid the government’s claims of a V-shaped economic recovery, Corporate India doesn’t seem to have pulled its socks up just yet for fresh investments, and a second Covid-19 wave coupled with a spike in core inflation could make the procrastination longer.
A pick-up in consumption witnessed in the December quarter — largely driven by release of pent-up demand during the festive season — has clearly not strengthened since; if anything, consumption has become weaker of late. The manufacturing and mining sectors, both employment-intensive, have shown signs of fresh weakness even as MSMEs and the informal sector, also big job creators, remain in the doldrums.
So, even if the Central government manages to double its budget spend in the ongoing quarter (Q4) from the year-ago level to meet the Revised Estimate of expenditure for FY21, the Gross Domestic Product (GDP) could contract in the March quarter at a rate steeper than the 1.1% estimated in the second advance estimate released by the National Statistical Office recently.
All this means that a very favourable base could turn out to be the only predominant push to the GDP in Q1 and Q2 of the next financial year, with not much support coming from heightened economic activity. The V-shape is being disturbed, for sure.
Compounding the growth worries would be the likelihood of RBI being forced to rethink its dovish stance, given both the wholesale and retail inflation rates. The ‘core’ inflation, which reflects more sustained, generalised upward movement of prices, has jumped in recent months.
Both investments and consumption demands continue to sputter. 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.
While the second and third Covid waves in many countries are receding, India seems to be entering into a second wave, wrote Saugata Bhattacharya, chief economist at Axis Bank. The country on Monday reported 26,291 new cases, the highest daily spike of 2021. Worse, while caseloads are going up in many states, the surge in Maharashtra (it has contributed over 60% of the fresh cases in the last few days), the most industralised state, is more worrisome for the economy. The second wave in the state appears to be much steeper than the first wave.
Inflation saw a broad-based rise in February. 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 the rise in oil prices: Brent reached $70 a barrel on Monday, as data showed China’s economic recovery accelerated at the start of 2021.
A sustained rise in oil prices could also have material fiscal consequences, as the Centre in that case may have to cut auto fuel taxes, a big item in its revenue kitty. Bank of America estimates that a Rs 5 per litre cut in taxes on petrol and diesel to ease pressure on consumers could widen the Centre’s FY22 fiscal deficit by 30 basis points from the estimated level to 7.5% of GDP. The Rs 5 a litre tax could reduce the Centre’s income from assorted specific levies on auto fuels by around Rs 71,760 crore, it added.
While a surge in retail food inflation was along the expected lines, core inflation (CPI excluding food, beverages and fuel) surprised on the upside by rising to 6% in February from 5.5% in January. Not just elevated oil prices, which can potentially inflate transport costs, but also discretionary items like clothing and health-related expenses added to sequential momentum in core CPI inflation.
“On the whole, underlying inflation is picking up, and growth will be sequentially weaker in Q1 after a fast-paced normalisation in H2 2020, but remains on a recovery path,” analysts at Nomura said. Still, at its next policy meeting on April 7, RBI will likely keep all policy rates and its accommodative stance unchanged, they added.
Demand for raw materials see a spurt as businesses go through the “reset phase”. This is set to inflate India Inc’s input costs and could weigh on its profitability.
According to the manufacturing PMI, input cost inflation hit a 32-month high in February on growing order flows and input inventory, too, saw a record rise. Even input cost inflation in the services PMI hit its highest in eight years in February.