The challenge is to ensure economic rebound continues into Q4 and beyond

The signs of an economic recovery, post the unlocking, are becoming increasingly evident: manufacturing PMI hit a decade high in October; GST collections for the month crossed the ₹1-lakh crore mark, the first time since February; auto companies are reporting a surge in sales; core sector output in September contracted by a much lower 0.8 per cent, against 7.3 per cent in August and 40 per cent in April. Coal, electricity and steel, which account for half the core sector index, were in positive territory in September. In an interview to this newspaper, the Finance Minister had expressed confidence that manufacturing capacity utilisation is on the rise and that it is not just a pent-up demand phenomenon. Meanwhile, the services sector is showing signs of an upswing, but its recovery has not been as sharp as manufacturing, as construction, real estate, hotels and restaurants are still struggling. The world over, it is manufacturing that has led the revival after relaxation of lockdown restrictions, and India is no different.

However, a sustained revival would depend on whether consumption, investment and exports pick up. Exports in October were down 5.4 per cent and by 19 per cent since April, while imports for the month fell more steeply by 11.6 per cent, in line with the trend of this year — an indication that both demand and supply factors are at work. If MSMEs at the forefront of the exports sector are hobbled by liquidity issues and labour shortage, a drying up of orders has made matters worse. India’s exports have been sluggish for some years, with Vietnam and Bangladesh having stolen a march. It is hard to foresee private investment being a growth driver (gross fixed capital formation is down from 29 per cent of GDP in June 2018 to 19.5 per cent in June 2020) at a time when bank NPAs are expected to rise to 12.5 per cent of gross advances by March 2021, mirroring over-leveraged balance sheets of corporates. While monetary policy incentives have alleviated the liquidity crunch and led to an improvement in bank credit, risk aversion cannot be wished away. The boost will have to come from consumption and public investment. The former has been decelerating since 2016-17.

Whether consumption sustains itself after the festive season would depend on ‘confidence’ and ‘sentiment’. Precautionary savings could increase in years to come. Public investment looks like the best growth driver. The surplus of savings over investment can dispel some of the fears over the impact of higher government borrowings on interest rates. India needs to ensure against asset destruction in the economy by getting the consumption-investment cycle going as soon as possible. Public spending can crowd in private investment. Global rating agencies are reconciled to high debt and fiscal deficits anyway. The key is to create growth conditions to deal with this ‘new normal’.

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