A speaker once remarked - “Life doesn’t get easier or more forgiving, we get stronger and more resilient.” The past few months have indeed taught us the value of resilience and adaptability. With the pandemic showing no signs of abating, the economy turning fragile and the continued tensions on the Indo-China border, India’s governance mettle is being tested, as is its resilience as a nation and its ability to adapt to a new reality.
A contraction of 23.9% in the first quarter GDP was more severe than most expectations but was symptomatic of the huge economic cost of the national lockdown. While the Central government mandated restrictions have largely been done away, local lockdowns/restrictions still hamper smooth economic recovery. It is likely that GDP will continue to contract in Q2 and Q3 FY21, albeit at progressively lower rates. Consensus estimates indicate a ~10% contraction in GDP for this fiscal year. Higher healthcare, defence and social security spending would necessitate pausing fiscal consolidation. Estimated fiscal deficit for the year at ~10-11% of GDP and the estimated debt/GDP levels (~85%+) foretell a fragile macroeconomic situation. On the other hand, record forex levels (~USD 542 billion), soft crude prices (~USD 40/bbl) and a likely current account surplus mitigate any significant systemic risk to the economy at large.
Retail consumption is getting squeezed across income levels. At the upper end of the income curve, consumers are saving more (foregoing discretionary expenditure) as they are in a risk averse mode, while at lower income levels the focus is on basic essentials and consumers are invariably borrowing more to make ends meet. This has had a pincer impact on consumption demand, whose revival is critical to restoring the economic growth trajectory.
Fortuitously, leading economic benchmarks seem to indicate a trend reversal. A likely record kharif output coupled with ongoing government support through MNREGA should boost rural incomes.
Month on month, 2-wheeler and passenger vehicle sales, power consumption, e-way bills and freight movement have been increasing progressively. Adequate domestic liquidity (~USD 80 billion) with low interest rates should revive credit demand and offtake in the medium term with green shoots of consumption revival likely to appear around the festive season. Widespread restoration of economic activity should lead to an expansion of the services and industrial sectors from the beginning of Q3 FY21.
During these tumultuous times, our individual abilities to focus on our work and home is being tested. “Stillness is the Key” a book by Ryan Holiday talks about how having a lucid focus has assisted leaders across generations. Makes for interesting reading!
Authored by: Ritesh Chandra, Managing Partner