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Economic recovery begins, but what kind?

The Indian economy entered a tail turn due to the second wave of Covid-19 infections, but with the infection curve on a downward trajectory and the unlocking process underway, Delhi and Mumbai removed many restrictions on June 7, the latest high frequency. Indicators show that the economy has started to recover. However, given the experience of the economic recovery after the first wave, it is also important to look at nature and not just its trajectory.

NIBRI has gained ten points in the last fortnight

Nomura India’s Business Resumption Index (NIBRI) jumped to 69.7 in the week ending June 6. The NIBRI certainly bottomed out in the week ending May 23 when it fell to 60.3. It increased to 62.9 in the week ending May 30. The latest NIBRI value is comparable to the week ending June 21, 2020. A NIBRI value of 100 indicates a pre-pandemic level of economic activity. The question we must ask ourselves is whether NIBRI will follow last year’s trajectory or will it grow at a faster rate.

“Short-term growth dynamics continue to depend crucially on two factors: the rate of relaxation of blockages and the rate of vaccinations. The first will determine the speed of recovery of mobility and economic activity in general, while the second will be important to ensure that the number of cases is kept under control and that the relaxation of the blockade is maintained, “said a note from economists. by Nomura Sonal Varma and Aurodeep Nandi. .

The job market is still bad

Employment figures from the Center for Monitoring the Indian Economy (CMIE) suggest that the employment scenario remains worrying. The unemployment rate has been in double digits for the past four weeks. In fact, it increased from 12.15% to 13.62% between the week ending May 30 and June 6, despite the fact that the NIBRI, which is supposed to be an indicator of economic activity, went up. “The Indian labor market is in its worst condition since the national shutdown months of April and May 2020,” wrote Mahesh Vyas, Managing Director of CMIE, in an article posted on the CMIE website. “Employment has been falling since January 2021 when it hit a recent peak of 400.7 million. It has fallen in each of the four months since. It fell by 2.5 million in February, 0.1 million in March, 7.4 million in April, and then 15.3 million in May. Therefore, the accumulated loss since January is a substantial 25.3 million. This is a significant drop of 6.3% in the employed labor force in a period of four months ”, he added. CMIE is the only source for high frequency employment indicators in India. The CMIE figures are in line with a drop in perception about employment in the latest round (May 2021) of the RBI Consumer Confidence Survey.

Companies are deleveraging instead of investing

Labor markets lagging behind production growth have led to what has been called profit-driven growth in the Indian economy in the last fiscal year.

A June 8 research note from Soumya Kanti Ghosh, the Group’s Senior Economic Advisor at the State Bank of India, clearly shows this. Ghosh analyzed the results of 1,000 publicly traded companies for 2020-21 and found that profits grew at a much faster rate than revenue in most sectors. “We observed a 4% decrease in the top line (income), while EBIDTA and Profit After Tax (PAT) grew 19% and 54% respectively during fiscal 2020. However, excluding BFSI (banks , financial services and insurance) and refineries, the group reported a 2% growth in gross income and a 36% and 34% growth in EBIDTA and PAT ”, the note reads.

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Lack of demand, reflected in poor revenue growth, also means that companies are deleveraging rather than investing, even though the monetary policy environment remains accommodative. “A direct corollary of the pandemic in fiscal year 21 was a clear slowdown in bank credit growth that has also continued in fiscal year 22. We believe that such low credit growth was a direct consequence of the rapid deleveraging of companies by repay high-cost loans through funds raised through bond issues, “adds the note.” Interestingly, business readiness for new investment remains low today as the economy is still recovering from the devastating second wave. “

If companies continue to prioritize deleveraging over investment, it will inevitably perpetuate a vicious cycle of low investment demand leading to massive low incomes leading to low consumer demand, generating more headwinds for investment. investment demand. This is exactly where the role of a fiscal stimulus comes in, which can boost massive demand and break this vicious cycle.

Economic recovery begins, but what kind?

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