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A monthly report released by Finance Ministry on Friday highlighted good performance in high frequency indicators such as automobile sales, e-Way Bill, exports and others to claim that recovery has begun. This claim has been made two days after the economy saw almost a quarter of GDP (Gross Domestic Products) being wiped out during the first three months (April-June) of the financial year.

“As countries unlocked in the quarter starting in July, recovery is under way globally. India, too, is witnessing a sharp V-shaped recovery,” said the latest edition of Monthly Economic Review (MER), prepared by the Economic Affairs Department of the Finance Ministry. The report took note of India’s manufacturing purchasing managers’ index (PMI) moving into expansionary zone with a reading of 52.2 in August. This has happened for the first time since the lockdown and is indicates recovery prospects for the manufacturing sector.

The report also highlighted the V-shaped pattern of recovery seen in a number of areas such as sales of automobiles , tractors, and fertilisers, as also a rise in railway freight traffic, steel consumption and production, cement production, power consumption, e-Way Bills, GST revenue collection, daily highway toll collections, retail financial transactions, performance of core industries, capital inflows and exports.

Farm sector unfazed

According to the MER, agriculture has emerged as a resilient silver lining in the current scenario. It suggested policy priority towards building efficient and sustainable agrarian supply chains for a persistent increase in farmer incomes has got reinforced more than ever before. “Such a dynamic shift towards promoting deregulation and liberalisation of the agricultural sector is already under way with the Government announcing landmark reforms in this direction,” the report said.

Talking about manufacturing, it said fundamental change in the world order also invokes realignment in the conventional perceptions on efficiency versus resilience of the manufacturing sector. “Deep-seated and wide-ranging structural reforms in land, legal, labour and capital markets to reverse the slowdown in manufacturing and to boost risk appetite are pertinent in this regard,” it mentioned.

Services sector hit

Amidst business closures and below normal footfall, the report finds that the services sector remains the worst hit with demand plummeting across the globe. With the services sector being the biggest employer in the nation, building sufficient flexibility for service organisations for the duration of the pandemic response and beyond is paramount for India’s eventual economic recovery. “Leveraging India’s ICT revolution and upscaling Digital India at an unrivalled pace is essential for lending much needed resilience to the service sector,” it suggested.

Disconnect

The report highlighted risks of an apparent disconnect between the real economy and financial sector. “The recent gush of liquidity in emerging markets is driven by low interest rates, unprecedented monetary priming by major global central banks and optimistic prospects of Covid-19 vaccine,” the report said, while adding that stock markets are deriving their inexplicable buoyancy from this global surplus liquidity.

It concluded possible risks of disruptive market corrections may manifest in terms of capital flight, currency volatility and ensuing worsening of balance-sheets of firms, posing negative macro-implications for global labour markets as well. It may be noted that last month RBI Governor Shaktikanta Das, too, had talked about clear disconnect between the sharp surge in stock markets and the state of real economy.

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