India is witnessing a rapid turnaround from the gloom of the second wave to a sense of guarded optimism. As anticipated, the Q1 FY22 GDP growth rebounded to 20.1% (largely due to the low base effect) although it contracted by 6.3% sequentially, due to the impact of the second wave – driven by the contraction in private consumption (8.9%) and investment (15.2%). Despite the massive humanitarian crisis, calibrated lockdowns minimized the impact on the economy. With the situation largely stable since June, the economy is rapidly picking up momentum. High frequency indicators in August – electricity generation (15.7%), GST e-way bills (65.89 mn), average daily toll collection (INR 992 mn) coupled with enhanced service activity seem to indicate a strong rebound. The accelerated pace of vaccination (8 mn+/ day) has added to consumer confidence.
Buoyant government receipts (net direct taxes up 74% over the previous year) and relatively lower public expenditure have ensured that the fiscal deficit is well within the budget. Hence monetary policy is likely to remain accommodative. In the short-term, inflation is likely to be driven more by supply side constraints rather than an uptick in demand. NREGA demand, though, continues to be high indicating that blue collar unemployment is still an issue. Export buoyancy (estimated at USD 400 bn this fiscal) and the downstream impact of the PLI schemes is likely to significantly boost economic activity in the coming months. This should lead to a trickle-down impact and household consumption (impacted by job losses, increased medical expenses and the threat of a third wave) is likely to revive gradually.
Emerging markets like India continue to benefit from a globally benign liquidity environment. Despite the imminent taper risk, global capital continues to chase Indian assets. Heightened PE/VC activity (~USD 47 bn investment YTD) is a manifestation of this trend. Domestic capital markets continue to soar to record levels driven by strong domestic inflows, although FPI inflows continue to be tepid (~USD 9 bn net investment YTD). Expectations of robust corporate performance and earnings expansion are driven by a nascent revival in consumer demand and export growth. Recent policy initiatives like the ‘Bad Bank’ and the ‘National Monetisation Pipeline’ have the potential for unlocking tremendous latent value in the ecosystem and will be keenly watched. There are, however, a few risks that we are watching carefully over the next few months (a) impact of the Evergrande default in China; its ripple effect on the emerging markets (b) a premature Fed taper led by higher US inflation, and (c) a potential third wave impacting India.