Pent-up demand or Dead Cat Bounce?

As the second wave of Coronavirus ebbs across the country, expectations of a remarkable economic recovery – as rapid or even faster than what was witnessed post the first wave have begun to do the rounds. When the virus struck for the first time, it shaved off almost quarter of the GDP in the April-June period last year. But as the impact of the virus waned and lockdowns were lifted, growth returned with the third and fourth quarter posting positive growth. Indian economy, it appeared, was poised for a strong bounce back before the second wave hit the nation.

But unlike in the case of the first wave, the lockdowns across the country were neither uniform nor total. This permitted some amount of economic activity. So the first quarter of FY22 is unlikely to be as bad as the previous fiscal. Does that mean that recovery will be rapid? It has to be noted that the impact of the second wave has been far more extensive and debilitating in terms of number of cases and deaths. Also, the first wave was more an urban phenomenon.

But the second wave has been widespread and did not spare rural India which powered the quick recovery last time around. How will this impact rural spending?

Also the monsoon, normal for the last two years, is showing signs of slowing down this season. The only saving grace is that the global economy is in much better shape than last year and that should, hopefully, help the exports. But Indian economy is fuelled largely by private consumption which in FY21 was 4.1 per cent lower than, not FY20, but FY19. Conditions today are such that this downtrend is unlikely to reverse in a hurry.

Stretched household finances

The number of Covid cases in the country has crossed three crore and deaths, though officially put at 3.9 lakh, is estimated at anywhere between 1.8 million and 2.4 million. The virus, this time around, has touched every family forcing them to spend a lot on healthcare and this has stretched their balance sheet. Evidence of it is seen from the household financial savings data put out by RBI. Growth in savings has fallen sharply from 21 per cent of GDP in Q1FY21 to 8.2 per cent in Q3FY21. The savings growth after the second wave, even if there is one, would be even less.

And people have been forced to pledge their gold big time to meet their expenses. According to RBI, loans against gold by banks rose from ₹33,476 crore in April last year to ₹60,726 crore in March, 2021. This figure, once updated, will see a far more increase thanks to the second wave. What is even more worrying is that people who are pledging the gold are unable to redeem it. Manappuram Finance in Q4 of FY21 auctioned-off gold worth ₹404 crore as against ₹8 crore in the previous three quarters put together. Financial distress, it appears, is severe.

Even those families that have been spared have been spending on medicines to boost immunity. According to data from All India Organisation of Chemists & Druggists, Indians spent as much as ₹15,000 crore on vitamin supplements between June’20 and May’21.

Significant job loss

CMIE puts the salaried jobs lost in FY21 due to the pandemic at 9.8 million. Overall job losses, after the second wave, is estimated at 120 million which is 30 per cent of total population employed across all sectors. In the month of May alone 15 million jobs were lost.

As of June 6, 2021, unemployment rate was a high 13 per cent. Indian labour market, it says, is in its worst condition since the nation-wide lock down during April-May’20.

Shrinking middle class

If there is one segment of India’s population that drove consumption demand, it is the middle class. Hit by high medical costs and job losses, that segment is shrinking. According to Pew Research Centre Report, the nation’s middle class shrank by 3.3 crore in 2020 even before the second wave. The same report said that 7.5 crore people have been driven to poverty (earning less than ₹120 per day). These numbers would be much higher as things stand today.

Poor consumer confidence

All these factors have meant that consumer confidence as measured by RBI (May round) is at an historic low. The survey revealed that household spending has weakened considerably with people not only cutting back on non-essential expenditure but also moderating essential spending.

With experts warning of a probable third wave and emergence of new more dangerous variants of the virus, consumer confidence is unlikely to revive in the near future. People would rather save (or pay off their debts) rather than spending aggressively. Also in India when there is a death in the family, people do not celebrate festivals that year. This could mean less purchases during the festive season. These are bad news for people who are hoping for a huge pent-up demand.

Some have argued for a strong fiscal stimulus to revive consumer confidence and spending. But that is debatable as people, worried about their future, could end up saving rather than spending. The government, for its part, continues to keep ‘its powder dry’. It has refrained from any fiscal stimulus during the second wave. The truth is that it has very little elbow room to spend.

The economy, which has been slowing down even before the pandemic struck, had a very low level of immunity. Any rash moves (like monetising the deficit), the government rightly worries, could trigger a rating downgrade (to junk status) and a possible flight of capital from the financial markets. RBI too is in a dilemma. While it may have retained its ‘accommodative’ stance to aid economic recovery, rising inflation is tying its hands down when it comes to any more monetary stimulus in the form of rate cuts.

Thus under these circumstances, what one can reasonably expect is, not a huge pent-up demand, but a dead cat bounce.

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