India was on the path to economic recovery; local lockdowns threw a spanner in the works

NEW DELHI: The revival that accompanied the easing of restrictions last month seems to have lost steam with localised lockdowns being re-imposed across several cities due to the resurgence in Covid-19 cases. That’s disrupted economic activity, cut off supply chains and dampened sentiment, said experts.

Key economic indicators such as e-way bills, mobility indices, labour participation rates and electricity consumption are down in July so far compared with their levels over the same period in June.

Economists said the pent-up demand due to the lockdown that gave a boost to the economy in June may not be sustained and the disease will need to be brought under control to get the economy back on track.


The Nomura India Business Resumption Index (NIBRI), a weekly measure, fell to 66.8 for the seven days ended July 12 from 69.3 on July 5 and 70.5 at the end of June.

“Plateauing of NIBRI is a worrying sign that the recovery may lose some steam after the initial post-lockdown normalisation,” the Nomura Global Market Research report said.

Mobility indices have flattened
Encouraged by the uptick, the government had heralded the “green shoots” of recovery. But most of the indicators cited were for May or June. The nationwide lockdown imposed in late March had been eased in stages through May.

In the first 13 days of July, 17.2 million e-way bills were issued, lower than the 18.7 million generated last month until June 15. E-way bills are needed to transport goods worth more than Rs 50,000 under the goods and services tax (GST) regime.

Mobility indices, another indicator of economic activity, have flattened since mid-June. According to Google, workplace mobility has been at about 30 percentage points below normal since mid-June, with movement to transit stations and retail stores remaining flat.

The labour participation rate has been falling since June 21, weekly data from the Centre for Monitoring Indian Economy (CMIE) showed. The rate fell for three consecutive weeks and stood at 40.4% for the week ended July 12 after touching a peak of 42% in the week ended June 21.

Though the unemployment rate improved marginally to 7.4% in the week to July 12 against 8.9% in the week prior to this, CMIE warned that July may see little gain in terms of jobs returning in the economy due to repeated lockdowns.

Waning pent-up demand
Economists said pent-up demand due to the lockdown until May end led to a spurt in activity but that may not last beyond July.

“The bounce-back that we saw in June immediately after the lockdown will now turn into a gentle recovery as the pent-up demand gets saturated and there is reduced mobility due to periodic lockdowns at lots of places,” said HDFC Bank chief economist Abheek Barua.

CARE Ratings chief economist Madan Sabnavis said, “Whatever demand we are seeing is pent-up demand coming from pockets which are opening up, and this may come down if lockdown is imposed.”

Crisil principal economist DK Joshi said, “While high-frequency data shows uptick in demand, these are still below pre-Covid levels or compared to last year, which means the economy is still contracting.”

EY chief policy adviser DK Srivastava was more upbeat, saying the government’s stimulus measures would make an impact, since many industries, especially micro, small and medium enterprises (MSMEs), will benefit from liquidity measures, low interest rates and credit being offered by banks. The Indian economy is forecast to contract as much as 7% in FY21.

Lockdown impact
Risk aversion among the public at large and local lockdowns by different states and cities have contributed significantly to the slowdown this month. Uttar Pradesh has mandated a closure of all markets on weekends, while Bihar has announced a full lockdown from July 16 until the month end. Pune and Bengaluru are also on lockdown as cases have spiked.

“Even a 15-day lockdown in industrial pockets can push back the economy significantly,” said Sabnavis of CARE Ratings. “Hence, the reaction of various state governments to the pandemic will determine the economic recovery.” Going forward, people will tend to postpone consumption and hold on to savings, said Joshi.

Even short-duration lockdowns in industrial pockets could hamper revival. Therefore, the reaction of various state governments to the pandemic will determine the pace of recovery, economists said. Barua said that sustaining the recovery phase will be the toughest challenge and any lockdown will impact supply chains elsewhere.

“Unless we get hold of the disease and its spread, there is very little we can do to offset the economic impact, as the government has clearly indicated that they do not have very large fiscal space to expand,” he said.