Mumbai – After one of the world’s strictest lockdowns brought India’s economy to its knees, the country’s latest economic data shows signs of a tentative recovery.
According to official figures released on Friday, India’s gross domestic product (GDP) contracted by 7.5 percent in the second quarter (July to September), an improvement on the previous quarter’s record-breaking 23.9 percent fall. With two consecutive quarters of negative growth, India has now formally entered a recession, even as it shows signs of improvement.
COVID-19 restrictions have eased since June, allowing economic activity to resume. The manufacturing sector registered a particularly strong rebound, growing 0.6 percent in the second quarter, compared with a 39.3 percent decline in the quarter before.
There’s a risk that once this initial surge of festive and pent-up consumption is over, the growth momentum might slow.
Indian shoppers who are eager to hit stores after being locked down at home have also helped drive the recovery.
September marked the start of India’s festive season, a period when families typically buy new clothes and big-ticket items like jewellery. Passenger vehicle sales were up 17 percent this September compared with September last year, according to the Society of Indian Automobile Manufacturers (SIAM).
But while the onset of the festive season was helpful in getting people to spend money again, it may have exacerbated the spread of the coronavirus.
COVID-19 cases have returned to critical levels in the national capital, New Delhi, and other big cities, with India’s total number of infections surpassing 9.3 million – the second highest in the world. This has prompted calls for possible localised lockdowns and new travel restrictions that analysts warn will slow the pace of economic recovery.
“The economy is not necessarily in autocorrect mode yet,” Aurodeep Nandi, India economist at global financial services group Nomura, told Al Jazeera. “There’s a risk that once this initial surge of festive and pent-up consumption is over, the growth momentum might slow.”
India’s economy was already slowing before the pandemic hit. A long-running banking crisis and inadequate stimulus measures had put the brakes on growth. Once the fastest growing economy in the world, India’s growth slowed to 4.2 percent in 2019-20 – the lowest level in 10 years.
“Right now, we are in the ‘after-glow’ period as we exit from the pandemic crisis and we see things normalise – but we are feeling the impact of a fall in government expenditure on growth,” Nandi explained.
A patchy recovery
Though jobs are slowly returning, incomes are not where they used to be. While July saw employment rates return to near pre-COVID levels, nearly half of the households surveyed by the Centre for Monitoring the Indian Economy (CMIE) in October said their incomes were lower than a year ago.
This is because a lot of the jobs regained were in subsistence agriculture, which is actually “disguised unemployment”, Mahesh Vyas, CMIE’s chief executive officer, told Al Jazeera.
“Essentially, many people who say they are working are not earning anything,” he explained.
While Q2 data looks promising, we should not be misled and say that the recovery process has begun - Q3 is starting to look challenging.
Higher-quality, better-paying jobs cut from the formal sector have also not returned in an adequate way, Vyas added. That is dragging down overall incomes and weakening consumer power – a significant downside for a consumption-led economy.
“We did see a recovery until around August or September, but after that, there has been stagnation,” Vyas said. “While Q2 data looks promising, we should not be misled and say that the recovery process has begun – Q3 is starting to look challenging.”
A substantial rise in corporate profits is also being viewed with caution.
A November report from India’s central bank showed a 35 percent surge in net profits for non-financial firms, but analysts warn this is a result of cost-cutting rather than strong demand.
“Among other measures, companies are lowering their wage bills,” Uday Tharar, an emerging markets economist at investment firm GMO, told Al Jazeera. “That means the recovery that we saw in August and September is not translating into benefits for employees.”
If this continues, Tharar warns, it could hurt companies in the long run, driving down demand for their own products and services.
And while corporations might be faring OK for now, those in the informal sector and micro-, small- and medium-sized enterprises (MSMEs) – a sector that is India’s second-largest employer and a main driver of growth – are struggling.
Smaller firms have found it harder to get back on their feet without the infrastructure to keep employees working from home and the financial reserves to weather the shock of lockdowns.
Analysts also warn that because GDP figures are calculated using largely formal sector data, they may not adequately capture the pain experienced by the informal sector.
“We could be underestimating the level of damage that’s happening there,” Vyas said.
Restrained spending, reform-led recovery
Unlike in other economies across developed and emerging markets, India did not roll out a wide-scale cash transfer programme to support people who lost jobs or saw their savings obliterated by the coronavirus crisis.
A tight balance sheet, which was a concern even before the pandemic hit, meant the government chose to be “fiscally conservative” in response to the COVID crisis, Tharar explained.
“India entered COVID with already 68 percent of GDP in government debt,” he said. “Since this looks set to increase and with revenue collection plummeting, New Delhi feels it has to cut back on public spending.”
A widening fiscal deficit is also a concern, he added, since it negatively affects India’s sovereign credit rating.
The government has been criticised by some analysts for its tepid fiscal response to the crisis – which is estimated to amount to about 1 percent of GDP, rather than the 10 percent of GDP package announced by Indian Prime Minister Narendra Modi.
After an initial increase in spending at the start of the pandemic, by August, government expenditure was 15 percent lower than the previous year, CMIE found.
But other analysts agree with the need to limit borrowing to safeguard India’s credit rating, which was downgraded to a notch above junk status during the pandemic.
“The government has done as much as it could with its limited fiscal space,” Nandi said.
He also pointed to reforms initiated across the agriculture and manufacturing sectors, as well as upgrades to India’s labour laws, as ways the government is trying to boost the economy and create jobs.
“These are really significant and have been needed for a long time,” Nandi said, adding that while the policies’ success will rest on how well they are implemented, “these are not politically easy reforms to make.”
In the months ahead, India’s recovery will largely depend on how it responds to a second wave of coronavirus infections – and how quickly it can distribute a vaccine.
“As more and more people get vaccinated, parts of the economy that have yet to recover will come back up to speed,” Nandi said. “But in a country like India, this will not be simple or quick. Until the recovery, it will have to rely on easy credit conditions and hopes of stronger global growth.”