Economy

Finance Ministry pins hope on pent-up demand to lift recovery this fiscal

Shishir Sinha New Delhi | Updated on May 18, 2021

Economists remain cautious; heath spends likely to go up, says SBI research

The Finance Ministry pins hope on ‘pent-up demand’ to boost economic recovery during the second half of the current fiscal (2021-22). However, economists remain cautious.

“We hope that there will be a strong pent-up demand, just like we had last fiscal, and that will boost economic recovery during the current fiscal,” a senior Finance Ministry official told BusinessLine.

In FY21, offtake of consumer goods and automobiles saw strong recovery due to pent-up demand in November and December and the Q4 (January-March). This was reflected in the GST collection (at ₹1-lakh crore plus for seven successive months since October and then at a record ₹1.41-lakh crore in April) and the GDP growth rate of 0.4 per cent during Q3.

However, the GDP growth rate is expected to be back in the negative zone during the Q4 (which will be known on May 31).

What is pent-up demand?

Pent-up demand is an unusually strong demand for goods or services. Normally, when people postpone consumption due to various reasons such as a pandemic or even a lockdown and then return to the market, it is pent-up demand.

Meanwhile, economists do not agree with the official’s views on pent-up demand this fiscal.

Devendra Kumar Pant, Chief Economist with India Ratings & Research, said this time pent-up demand is unlikely to be as strong as last year with increased uncertainty due to the prospects of third wave, as experienced by European countries. “Health expenditure has increased significantly. Hence, it is likely that the consumption recovery after the second wave will be slower than the first wave,” he said.

‘Ecowrap’ estimates

SBI’s economic research report ‘Ecowrap’ estimates health expenditure to go up from the current 5 per cent of PFCE (private final consumption expenditure) to at least 11 per cent. In absolute terms, this could go up by ₹66,000 crore. “This is likely to also result in squeeze in expenditure on other items of discretionary consumption, a recipe for a cutback in the consumption spending,” the report said.

The report also talked about an income effect due to lower per capita income, which has “reportedly declined by ₹8,637 in FY21 from FY20 (CSO estimates). Assuming on a conservative basis, the income of private and unorganised sector employees has been impacted, as per our calculation, the income effect works out to around ₹16,000 crore.” The report concluded that the loss in income could be an added burden and a diversion from other ‘discretionary spends’ to health.

Meanwhile, some experts are of the opinion that demand will not be affected this time. The RBI, in its May monthly bulletin, said the impact of the second wave on the real economy seems to be limited so far compared to the first wave.

Evidently, the localised nature of lockdowns, better adaptation to work from home protocols, online delivery models, e-commerce and digital payments are at work. “Aggregate demand conditions have been impacted, albeit not on the scale of the first wave,” the bulletin mentioned.

Published on May 18, 2021

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