Growth recovering but private investment missing

After contracting for two quarters of the current financial year – April-June and July-September, economic growth is showing signs of revival as engines of demand are starting to fire from power demand to consumption demand and also buoyancy in the collection of Goods and Services Tax (GST) but private investment is still not visible.

The state of the economy report authored by Reserve Bank of India’s deputy governor Michael Patra and his colleagues observed that private investment is missing in this process of growth revival and ‘the time is apposite for it to come alive.’

“There is little doubt today that a recovery based on a revival of consumption is underway. The jury leans towards such recoveries being shallow and short-lived,” the report said while emphasising the need for private investment.

The report says, in terms of nominal GDP, 96% of the pre-pandemic economic activity has been restored. Early earnings of the corporate sector for the Oct-Dec quarter also indicate that sales continue to improve as they rise out of contraction, and operating profits have jumped due to a fall in raw material costs and savings on account of lower interest expenses.

It was also noted that mobility indicators show that movement of people across all major cities in January and February 2021 was comparable to pre-pandemic levels and goods movement also expanded considerably – as indicated by the growth in E-way bills.

Demand improving

On the demand side, there is an upward momentum with peak power demand touching a new high on January 30 and electricity consumption continues to expand. In addition, GST collections remaining over Rs 1 lakh crore indicated growing business and trading turnover going beyond the festival season, the report noted.

“Turning to consumption demand, the optimism surrounding the roll out of vaccination is captured in January 2021 round of the Reserve Bank’s consumer confidence survey. Perceptions have improved significantly over all preceding rounds conducted since September 2020,” the report said.

Though consumers expect an overall improvement in the general economic situation and in employment conditions for the year ahead hence an abiding comfort on spending on essentials, lingering uncertainty continues to prevail about nonessential spending, the report said.

Employment

The report cited the household survey of the Centre for Monitoring Indian Economy (CMIE), which found that the employment conditions improved through January 2021, with the average employment rate inching up to 37.9% from 36.9% a month ago.

Sectors like real estate, construction and services, which suffered employment losses during the lockdown, have evidently recovered to pre-Covid levels. Consequently, the average unemployment rate declined to 6.5% in January 2021 from 9.1% in December 2020.

“The pace of improvement was stronger in the case of rural employment than in urban areas, which suggests that India’s rural economy is quickly shredding the debilitating restraints of Covid-19,” the report said.

On the external front, India’s merchandise imports grew for the second consecutive month by 2% in January 2021, testifying to the growing strength of underlying growth impulses in the domestic economy that are taking root, it said. But India’s foreign trade is facing formidable logistical challenges due to the rising tide of protectionism.

Fuel price and inflation

The report noted consumer price index based inflation softening to 4.1% in January from 4.6% a month ago mainly due to a sharp retrenchment of food inflation – by 120 basis points (bps) from 3.9% in December. At the same time, fuel inflation edged up to 3.9% from 2.9% in December, primarily on account of a pickup in LPG inflation.

The report highlighted record high pump prices for petrol and diesel, which touched Rs 90 per litre and Rs 81 per litre respectively, are mainly due to hike in indirect taxes.

“The share of excise and VAT in petrol pump prices (Delhi) saw an increase from around 30% in July 2014 to 60% in early- February 2021,” the report said. It further said the direct contribution of CPI petrol (with a weight of 2.2% in CPI) to headline inflation jumped from 1.6% in July 2014 to 4.8% in January 2021.

The report said India had seen the least pass-through in the second half of the 2010s when crude oil prices had softened considerably from a cross country perspective. “Due to additional taxes post lockdown, the wedge with international gasoline prices has increased and the pump prices paid by Indian consumers are among the highest in the world,” the report said.

Dig at bond market

The report also took a dig at the bond market, as players decided to ignore the central bank’s promise of maintaining ample liquidity with Bond prices heading north since the Union budget announcement of additional borrowing of Rs 80,000 crore in the current fiscal. RBI’s assurance of maintaining ample liquidity was unable to soothe the nerves of the bond market participants as yields stayed elevated.

“A pity that these stark messages (assurance of ample liquidity, completing the government’s borrowing programme in an orderly manner) were lost to naïve adventurism by some bond traders! The Reserve Bank’s announcements were not intended to move earth and heaven, but that which we are, we are – one equal temper of heroic hearts,” the report said.

The yield on the 10-year benchmark government bond went up 33 bps since the budget, which closed at 6.23% on Friday.

(The writer is a Mumbai-based Senior Journalist)