Is economy recovering with easing of lockdown or sinking?

3 months ago 27
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We will (hopefully) have GDP statistics for the April-June quarter by the end of this month. There is complete unanimity that the June quarter will see an economic contraction vis-a-vis last year. India was under a strict lockdown for most of this period (two of the three months, with lockdowns continuing for longer in some parts of the country). The real question is what has happened to economic activity from July onwards. Is it recovering with the easing of lockdown restrictions? Has it plateaued with cases still rising and the imposition of intermittent lockdowns? Or has it become worse?

There is also the question of whether the recovery is merely sequential – current month over previous month – or strong enough to prevent an annual contraction from the second quarter onwards.

Most high frequency indicators suggest a sequential recovery until June, with a flattening in July.

The latest Consumer Confidence Survey (CCS) of the Reserve Bank of India —it was conducted in the first half of July — paints a poor picture.

It shows that people believe that the economic situation was much worse in July than in May when compared to year-ago levels.

This suggests that India’s GDP might remain in contraction mode in the September quarter, something RBI’s Monetary Policy Committee has hinted at and which, a recent Reuters poll of economists seconded.

The CCS also suggests that some key high frequency indictors might not be capturing the actual magnitude of distress.

The net current perception — difference between share of respondents who believe the situation has improved and deteriorated -- on general economic situation, compared to a year ago, reached its lowest level in the July CCS. To give an idea about the extent of fall, these numbers were -60 and -65.9 in the May and July rounds of the CCS. The previous low was -36.9 in September 2013.

A comparison of current perception on general economic situation in the CCS along with quarterly GDP figures shows that they have pretty much moved in tandem. This suggests that there is a high probability that the unprecedented collapse in May and July CCS might reflect in GDP numbers as well.


The CCS also records response on the employment situation. Here also, the current perception compared to a year ago has collapsed. Interestingly, the CCS response on employment does not seem to be in sync with the only monthly indicator of unemployment rates available in India, which are collected by the Centre for Monitoring Indian Economy (CMIE).

While CMIE’s unemployment rate data showed a spike in May 2020, when the country was under an almost complete lockdown, it has come back to pre-lockdown levels in July.

Because the CCS is conducted in 13 cities in India, we have compared urban unemployment from the CMIE.


To be sure, CMIE’s employment indicators are far from sacrosanct and show divergence with the figures published by the Periodic Labour Force Surveys (PLFS), which are India’s official source of employment data.

The differences between CMIE and PLFS employment indicators were discussed in detail in a Mint story by Sriharsha Devulapalli and Pramit Bhattacharya.

Also, the divergence between CMIE unemployment rates and CCS perception on employment existed even before the pandemic.

Does the CCS not capture the reality of the labour market? A research note published on 10 July, for the same period when the latest round of CCS was conducted, by Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets Private Limited, offers a clue. It says that while unemployment rates might come back to normal, “wage outlook could be dimmer than in the pre-pandemic world”.

Bhandari lists three reasons for this: more jobs being generated in the rural areas where wages are lower, a second-round-pandemic-led global weakness in labour markets due to job losses in the first round; and expectations of lower economic growth, an important driver of wages.

A squeeze in wages, even if it comes with an unchanged unemployment rate, will have a contractionary effect on purchasing power, aggregate demand and, therefore, growth.

Anecdotal evidence suggests that a large number of workers might have suffered a fall in incomes even though they have not lost their jobs.

A Mint story on 11 August pointed out that equity mutual funds have seen a fall in contribution from systematic investment plans, which suggests a corresponding decline in disposable incomes.

While it is important to track sequential recovery in the economy, it is crucial to not lose sight of the challenge of coming out of the annual contraction zone as soon as possible.

Restoring consumer confidence, which is key to demand, is a prerequisite to achieving this.

The latest CCS findings suggest that it will take more than a sequential recovery to boost consumer confidence -- and growth.

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