By the way

There has been a sudden surge of optimism in the economy with various high-frequency indicators — PMI numbers, auto production/dispatches, e-way bills generated, GST collections, etc. — showing positive tendencies. So, should we be celebrating? The answer is, yes and no.

Yes, because there is something good happening in the economy and hence bodes well for the future. No, because these improvements have already been buffered in any projections for the year and the overall prospects for the economy this year are dim.

The problem was with the lockdown, which brought activity to a standstill. April and May were probably the worst months when the economy was fractured quite badly and what is being witnessed today is a gradual recovery which goes along with the unlock process that started in June.

As the government has permitted activity to resume in different sectors albeit with several restrictions still in place, it was but natural that they get reflected in the macroeconomic indicators progressively.

Therefore, it is not surprising that these improvements will increase in intensity in the next few months till March 2021 as more activity is permitted. Hence, there is no surprise element here.

But for sure this cannot be interpreted as a V-shaped recovery. In fact, some of the indicators like the PMI are misleading when interpreted in this context, as they refer to comparisons made over the preceding months.

Hence, almost all the companies surveyed would say that they were better off in June than May and, similarly, in September relative to August as the space offered for business increased with relaxations in the lockdown.

To interpret such numbers as being all-time highs is misleading as it does not talk of physical quantity of goods or services produced that can be compared with the past.

How about GST collections or e-way bills? These are surely good indicators of activity increasing in the country. This again is a corollary of the unlock process which has led to more trucks moving in the country, and while it is a positive development, it is not really reflective of a recovery in the sense of the economy moving from a trot to a gallop.

Pent-up demand

Also, there is a case of pent-up demand in the country which is bound to get inflated once activities are on-stream. This held for aviation when restrictions were partly removed, and passenger traffic increased. Subsequently, there was stabilisation after the initial burst ended. The same will probably happen once restaurants or even theatres open.

There are two things that must be kept in mind here. First, to be sure that a new trend of recovery has started, the numbers must continue to increase for at least three successive months. The case of pent-up demand and the start of the festival-cum-harvest season will ideally give indications of enhanced business activity as consumer spending would tend to be higher than before.

The three-month rule is important because given that spending power has been truncated due to loss of jobs and salary cuts, the ability to spend continuously would be limited.

And, second, most estimates of GDP growth for the year are in the region of -6 to -15 per cent after buffering in the sharp de-growth of -24 per cent in the first quarter.

Evidently, none of these projections assume that the slump in the first quarter will continue and the logical trail of estimates is an improvement on a quarter-on-quarter basis. Therefore, the degree of negative fall in GDP growth would tend to narrow over the quarters and probably end with a positive number in fourth quarter by which time the unlock would probably be complete in terms of all sectors being operative albeit at different rates; services, in particular, will not be allowed to operate at 100 per cent capacity for sure.

The picture is, hence, not surprising. It was already observed in the case of core sector growth numbers, which are reckoned on a year-on-year basis, there was a marginal decline in August compared with July.

This is not surprising because there would be volatility in these numbers depending on the level of activity. Sectors such as cement and steel will be linked directly with infrastructure activity and as the government spends more or construction activity recovers, there would be sharp spikes in production relative to the previous months.

Even while interpreting tax revenue numbers, one must be cautious as the bunching impact of production will automatically get reflected in the tax collections on account of GST.

While these flows would increase over time, it would be erroneous to extrapolate these numbers to reflect sharp revival. The government will still be slipping quite significantly in tax collections that can range from 10 per cent to 20 per cent.

Also, there is the practice of deferring refunds to shore up resources and this will be prevalent in the next six months.

Sequential growth

All these indicators are crucial as they do tell us how the economy is progressing. All of them must improve sequentially over months even to maintain an overall fall in the economic growth of around 8 per cent this year as this number is premised on this betterment. But to conclude that the economy is back to normal will be erroneous and misleading.

In fact, any slippages over months should be taken seriously as that would mean that the positive spikes are more one-off performances rather than a sustained increase. And, any talk or debate on the shape of recovery going by these numbers is quite meaningless. It diverts attention from the fact that the economy has been hit by the lockdown and the road ahead is long and arduous.

The writer is Chief Economist, CARE Ratings. Views are personal