SURGE IN COVID-19 IMPAIRING ECONOMIC GROWTH

SURGE IN COVID-19 IMPAIRING
ECONOMIC GROWTH

By Prof. Lallan Prasad

Indian economy which had started showing a positive growth in the last quarter of FY 21 after continuous fall in first three quarters is again facing a tough time due to surge in COVID-19 cases going out of control in most States in the country. IMF upgraded it’s FY 22 growth projection for India to 12.5% from 11.5% estimated in January though cautioned that forecast was subject to recovery continuing which is not. Most economic indicators are showing downward trend.

Manufacturing activity fell to a seven month low in March.The purchasing managers’ index (PMI) for manufacturing sector fell to 55.4 in March from 57.5 in February due to slowdown in new orders, production and input buyings (figure above 50 shows growth). The cost of inputs increased faster than selling price of manufactured goods, and the demand growth was slowed down due to new wave of corona. Industrial production on the whole as measured by the Index of Industrial Production (IIP) contracted by 3.6% in February even before the beginning of second wave of Covid-19.

A sharp increase in corona cases has eroded consumer confidence with prospect of impending lockdowns. The consumer confidence index fell to 53.1 in March from 55.5 in January and future expectations dipped to 108 from 117 during this period as per survey of RBI. Respondents expressed lower optimism for the year ahead.

Retail inflation which fell to 4.1% in January rose to 5.5% in March nearer to RBIs critical level of 6%. Rise in food prices specially of meat, fish, pulses, vegetables and dairy products have been of concern to common man. Core inflation which measures the non food, non fuel component of the consumer price index increased to 6.07% in March 2021, highest since July 2018. Petrol and gas prices have been on rise. Increase in passenger car prices early this month by most car manufacturers may result in lowering the demand which rose in March 2021.

The job market, both urban and rural is facing heat again with growing uncertainties. Urban unemployment has already climbed to 9.81% in the week ended April 11, 2021 as against 7.2% in week ended March 28. Reverse migration of labour has begun in industrial metropolitans causing rise in rural unemployment rate also in the last three weeks. The national unemployment rate which was 6.6% in the week ended March 28, has gone up to 8.58% in the week ended April 11. During the same period rural unemployment rate rose to 8% from 6.8%.

The financial market is in a grip of uncertainties. The benchmark sensex plummeted1707.94 basic points on April 12, sharpest decline since February 26, washing away investor’s wealth of Rs. 9 lakh crores. Markets in Asia Pacific region traded lower as well. Foreign Institutional Investors (FIIs) sold a net $ 186 million of Indian equities in April though domestic institutional investors (DIIs) bought shares worth Rs. 1095.59 crores in the same period.

The services such as travel and tourism, hotels and resturants, shoppings, salons and movies which were coming out of the woods are again facing trouble with restrictions imposed by the central and state governments in the wake of rising corona cases at a speed unexpected domestically as well as internationaly.
Retail businesses are worried. as they have limited flexibility in terms of fixed cost such as rent, electricity, taxes, salary of staff and other overhead expenses, interest on bank loans etc. As business goes down margin is eroded.

The Government and the RBI are facing
twin challenges of breaking the chain and controlling Covid on one hand and speeding economic recovery on the other hand. Total lockdown may halt economic activities which is seen unaffordable, therefore partial lockdowns and other restrictions are imposed to control Covid.
The demand level in economy may not be adversely affected need adequate money supply. RBI has decided to infuse Rs.1 lakh crore in Q1 bond buying plan to keep a lid on long term interest rates amid a massive government borrowing program to increase infrastructure spending and continue with accommodative stance to underpin the fragile economic recovery.