Economy on the cusp of recovery

Banks and non-banks must use liquidity windows and newfound demand for credit to push economic revival aggressively

By Author Dr K Srinivasa Rao   |   Published: 9th Mar 2021   12:21 am

The economy moving from negative to positive growth trajectory in Q3 of 2020-21, posting 0.4% growth, marks an optimistic beginning, ending the recessionary sentiments. The advanced estimate for fiscal 2020-21 indicates a contraction of GDP at 8% and GVA (gross value added) at 6.5%, from the earlier estimates of the RBI at -9.5% and IMF’s -10.5%.

The industrial outlook survey of the RBI conducted during the same period further reaffirmed the positive trend, based on strong production, order books and employment. Its business assessment index also entered the expansion zone after two consecutive quarters of contraction and stood at 108.6 in Q3: 2020-21 from 96.2 in Q2: 2020-21.

The business expectations index too increased further to 114.1 in Q4: 2020-21 from 111.4 in Q3: 2020-21 with firms being upbeat about the demand and employment situation in the coming three quarters. With the inoculation drive picking up, strong business confidence will add to the recovery speed.

The other supportive macroeconomic factors include inflation recording a 16-month low at 4.1% in January. The rise in GST collections reaching Rs 1.13 lakh crore indicates that moderated prices are stepping up business volumes and sentiments.

Steady Industry

The pick-up in construction activity, with its potential backward and forward linkages, is slowly developing into a critical growth lever of the economy. Agriculture continues to show robust growth and is instrumental in strengthening rural demand. Increasing rural incomes and rising preference for private transport have led to a spurt in automobile sales, signalling resumption of demand.

The comparative data of high frequency indicators of January 2020 and January 2021 indicates that many of them are cruising fast towards pre-covid levels. The index of 8 core industries has moved from 137.4 to 137.6 breaching pre-covid levels. Domestic auto sales index was up from 16.5 to 17.3. Tractor sales too rose from 53,387 units to 78,345 units showing a clear sign of the uptick.

The manufacturing Purchasing Managers’ Index (PMI) too was a tad up from 55.3 to 55.7. As was the PMI services sector from 55.5 to 55.8 in February 2021. The Sensex has breached the 50,000-mark with foreign institutional inflows firming up. Forex reserves touched an all-time high of $590.19 billion during the week ended January 29 and stands at $584.55 as on February 26 with a spree of inflows continuing.

Among the few sectors coping with the Covid-induced stress are power supply, staying behind the curve at 111.4 in January 2021 as against 113.7 in January 2020 and aviation, which is badly struggling to emerge from the slowdown.

Agriculture, MSMEs

Notwithstanding the impact of the pandemic, agriculture and allied sectors continue to support the robust revival with their multifold impact. The increase in area sown under rabi remains record high at 685 lakh hectares, 2.9% higher than last year and 10.4% cent over the full season normal acreage (compared with 5-year average).

Similarly, wheat coverage stands at 14.1% above the normal acreage. The stock of cereals has gone up 3.9 times the buffer norms, indicating the continued support of minimum support price (MSP), and procurement and distribution operations of the government agencies. About 95.81 lakh farmers have already benefitted from the ongoing procurement operations at MSP.

An increase in acreage under pulses by 14.7%, record increase over the normal area for oilseeds, mustard and rapeseed would also reduce dependence on imports. The ongoing robust agriculture sector augurs well for another record production of 292 million tonnes of wheat, prompting a boost to the rural economy. A positive agriculture outlook continues to be the key lever of rural demand revival and consumption acceleration.

Strengthening of micro, small and medium enterprises (MSMEs) is needed by ensuring that the benefits of ease of doing business, seamless power distribution, speedy disbursement of collateral-free bank loans under the Emergency Credit Line Guarantee Scheme 2.0 to eligible entrepreneurs, restructuring of MSME loans under the RBI scheme reach them. When the increased spending on capital-intensive projects, infrastructure, social sector, reforms in mining, benefits to real estate, construction sector and other policy-driven initiatives begin to impact the grassroots level economy, the revival will gain better traction and employment intensity from 2021-22.


Financial Sector

The RBI has been making specific efforts to bridge the difference between financial and real sectors posing risk to the economy. Through planned intervention, the yields are softening, enabling the government to borrow at low rates. Stock markets reaching new heights are on a course correction. Liquidity continues to be comfortable and exchange rate management is in sync with the external sector dynamics.

Indian companies are fast tapping the international bond markets to raise funds for operational expenses while reducing their presence in the local rupee bond markets. The corporate sector is able to borrow cheap from abroad providing leverage in the range of 100 to 250 basis points depending upon the rating of the entity.

However, the flow of bank credit growth continues to be in the slow lane at 6.6% as on February 12 while the deposit is marking better growth at 11.8%. Banks and non-banks will have to join together using the liquidity windows and newfound demand for credit to more aggressively push revival.

Looking at the performance data trends of various sectors of the economy, the revival is clearly firming up. The intensified vaccination programmes across the globe and the public gaining confidence in immunisation, employment and economic growth can accelerate, pushing recession further into history. At this point, stakeholders and government agencies should join in supporting the growth momentum to ensure sustainable growth in 2021-22 and onwards.

(The author is Adjunct Professor, Institute of Insurance and Risk Management. Views are personal)

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