December , 2020
Indian economy recovering amid uncertainty
11:42 am

Tushar K. Mahanti

Even as the debate over India entering into a recession is plaguing the country, news of improving macro fundamentals are pouring in. The issue of recession has become the centre of discussion in the Indian media ever since the article ‘An Economic Activity Index for India’ published in RBI’s November Monthly Bulletin suggested that India has entered a phase of recession in the first half of 2020-21. After recording a near 24% GDP deceleration in the first quarter and another GDP, a subsequent de-growth in the second quarter paved way for the Indian economy’s entry into a recession that requires two successive falls in GDP.

These findings are based on “nowcasting” models, which are used to predict the present, the very near future and the very recent past of the economy on a real time basis using high-frequency macroeconomic indicators. Maybe, the RBI has now articulated the GDP decline as a recession and as per definition, India has entered into a technical recession.

But even if India entered into a technical recession in the second half of FY21, its severity seems to have started waning with improved performance by most of the macro fundamentals compared to where it had gone down; be it industrial output, GST collections, PMI index, FDI inflows or electricity generation. Improved performance by the macro fundamentals has also raised hope for better GDP figures in the coming quarters.

Rating agencies are upbeat

The international development bodies and rating agencies are projecting a revival of the Indian economy and are expecting better growth figures in the coming quarters. The global forecasting firm Oxford Economics in its latest report has said that “...robust bottom-up activity data suggest that the economy may be recovering faster than we anticipated. Moody’s Investors Service too has upgraded its GDP forecast for India from a contraction of (-)9.6% earlier to -8.9% now.

Global investment banks like Goldman Sachs and Morgan Stanley have sounded optimistic about India’s economic recovery and have forecast a strong rebound next year as economic activity gathers momentum. Goldman Sachs expects India’s GDP growth to rebound to 13% in FY22 (above consensus expectations of 10.9%), after an expected 10.3% contraction in FY21. The US investment banking giant had earlier forecast the Indian economy to contract 14.8% in 2020-21.

Morgan Stanley was more optimistic and said that they “expect the growth recovery to strengthen in 2021, with GDP growth improving to 9.8% from an estimated contraction of 5.7% in 2020. We estimate the economy to have recovered to the pre-pandemic level of output in 4Q20.” However, it suggested that the cyclical growth strength should be supported by a accommodative monetary policy stance.

Back home, RBI has predicted that the economy could turn the corner and register positive growth earlier than expected. “Incoming data for the month of October 2020 have brightened prospects and stirred up consumer and business confidence. With the momentum of September having been sustained, there is optimism that the revival of economic activity is stronger than the mere satiation of pent-up demand released by unlocks and the rebuilding of inventories,” RBI has remarked.

“If this upturn is sustained in the ensuing two months, there is a strong likelihood that the Indian economy will break out of contraction of the six months gone by and return to positive growth in Q3:2020-21, ahead by a quarter of the forecast provided in the resolution of the monetary policy committee,” the central bank predicted.

 Macro fundamentals improving

The economic lockdown following Covid-19 led to a sudden stop in economic activity all over the world. The supply disruptions caused by the lockdown were magnified by large-scale demand destruction from employment and income losses, weakening of consumer and business confidence, heightened uncertainties, contraction in global trade and tourism and behavioural changes like voluntary social distancing.

What is encouraging, however, is that although Q1 performance of most of the growth indicators was poor, there are signs of improvement with the beginning of Q2. As the country goes through phases of 'Unlock' and economic activities are permitted in a staggered manner, the Department of Economic Affairs' (DEA) October 2020 economic report has appeared optimistic and suggested that the worst seems to be over for the economy with major indicators showing improvement. Movement of high frequency indicators in October clearly point towards broad based resurgence of economic activity and the report claims.

Rural consumption has stayed strong while Manufacturing Purchasing Managers’ Index rose from 56.8 in September to 58.9 in October, pointing to the strongest improvement in the health of the sector in over a decade. PMI Services index also rose to 54.1 in October, ending the seven-month sequence of contraction, signalling improved market conditions.

Reflecting the trend, the GST collections for example, have started increasing since last May indicating that economic activity has picked up. GST collections that nose-dived to `32,172 crore in April increased to `1,05,155 crore in October 2020. GST collections in September and October 2020 were higher than those of the same months in 2019 indicating that economic activities have picked up. The growth of GST collections in later months was largely because of the higher service sector activities which are reflected in the rising PMI Services index.

 GST collections (Rs crore)


























Source: Ministry of Finance, GoI.

With the rising demand from the realty sector and automobile industry, the production of steel, which declined to a paltry 2.1 million tonnes (MT) in April 2000 when the industrial activities came to a complete standstill following lockdown, has picked up thereafter. The production increased to 6.08 million tonnes in May and now in October, the production at 8.99 MT was more than that of the same month in 2019.

India’s leading steel makers ramped up production to either the pre-Covid level or more in Q2 with capacity utilisation rate touching an average 85% amid a strong recovery in domestic demand.

During July-September 2020, Tata Steel India's production stood at 4.59 MT against 4.50 MT in the same quarter a year ago. Tata Steel’s sales in Q2 FY 21 increased to 5.05 MT from 4.13 MT in the same quarter in the previous fiscal.  Notably, the sales at 5.05 MT were the highest ever quarterly deliveries in India.

JSW Steel reported crude steel production of 3.85 MT in the second quarter of the current fiscal - up by 30% from the 2.96 MT in the previous quarter. The company recorded an average capacity utilisation of 86% in Q2 FY21 in line with pre-Covid- level of 85% last year.



Steel (Mln tonnes)

Cement (Mln tonnes)

Power (Bln MWH)


















































Source: Ministry of Commerce & Industry, GoI.


Likewise, cement production too after an initial shock has started increasing following unlocking of the economy. Cement production fell to just 4.3 million tonnes in April from 24.8 million tonnes in the previous month. The production began increasing from May and was estimated at 24.23 million tonnes in June – marginally lower than the production in the same month a year ago.

The cement sector has seen a robust demand growth of over 10% Y-o-Y in September 2020. The volumes have picked up with pan-India utilisation at around 70% - led by a healthy rise in construction activities post-monsoon across regions.

While rural and semi-urban housing demand continues to drive consumption growth, pick-up in government-led infrastructure or low-cost housing aided it. The pent-up urban demand and non-trade demand, especially in south and west regions, are likely to improve going ahead with the gradual return of migrant workers.

With the rising economic activities, the generation and consumption of power has increased steadily since last May. Power consumption grew by 13.4% to 110.94 billion units (BU) in October driven by buoyancy in industrial and commercial activities. Power consumption in the same month in 2019 was recorded at 97.84 BU.

A double-digit growth in power consumption in October, experts said, gives sufficient indication that commercial and industrial demand has perked up with the easing of lockdown restrictions and will improve further in coming months.

What is surprising is that amid severe disruptions in economic activities that led to production cut across sectors, India Inc has sharply expanded gross and operating margins. The cumulative net profit of 3,146 listed companies reached a record `1.54 trillion — up by nearly two and half times on a year-on-year basis. The surprise upside on earnings came despite a continued contraction in sales volumes and revenues. The combined net sales of these companies declined by 5.7% in Q2 FY21 compared to the same quarter last year.



India Inc performance (3146 cos)

Item / Rs crore)



% Change





Other income




Operating profit












Net profit




Source: Dalal Street Journal.



The sharp increase in profits despite a fall in revenue was probably due to decline in input prices. On top of it, many manufactured goods such as metals, cement, tyres, and glass, among others, saw a sharp rise in prices due to a combination of disruption in domestic manufacturing and import restrictions. In addition, the profit of corporate India was also inflated because of lower employees’ cost due to rationalisation of workforce and wage cuts. If so, many of these tailwinds may vanish as commodity prices rally and economic activity normalises.

Stock prices, however, suggest this has raised earnings expectations among equity investors, which may not be easy for India Inc to meet, given record high valuations in most sectors. The Sensex has continued to rise and crossed the 44,000-mark. The Nifty too soared to 13000-mark in November 2020.

To bolster the revival story came the news that India in April-August 2020, received the highest ever FDI inflows during the first five months of a financial year. The total FDI inflow into India in the first five months was $35.73 billion – 13% higher than that in the same period last fiscal.

The FDI equity inflow received during April - August 2020 stood at $27.10 billion, which is also the highest ever for the first five months of a financial year and 16% more than the same period last year. FDI is a major driver of economic growth and an important source of non-debt finance for the economic development of India.

If India's unemployment rate for October rose slightly to 6.98% compared to 6.67% in the previous month, according to the latest data by private think-tank Centre for Monitoring Indian Economy (CMIE), the figure is considerably lower than that of earlier months.


Unemployment rate (%)

















Source: CMIE


Despite a rise in joblessness rate on a national level, the unemployment rate in urban areas declined for the month. The rural areas, however, saw a big rise in unemployment for the month. The urban unemployment rate declined to 7.15% in October from 8.45% in September, while the rural unemployment rate rose to 6.90% in October from 5.86% in September.

 The flipside of economic recovery

The narrative of India’s growth recovery so far seems impressive. New Delhi has already declared that all is well with the economy. But while the rating agencies and RBI are projecting an economic revival, they are doing it with caution that only meticulous government policies and strategies would keep this uptrend continue. The FM on her part, has announced a `2 lakh crore production-linked incentive (PLI) package to boost demand in the country.  

The first question that arises is what is the bench-mark of this recovery? If the bench-mark is the performance of the indicators in the first month of the lockdown, then certainly macro indicators have done well. Even when the performance of the second quarter of FY 21 is compared with that of the same period of last year, it would look encouraging.

But then the economy in itself had witnessed a severe slowdown in 2019-20 – before the Covid-19 and lockdown struck the country. Even a little increase would exemplify the rate of improvement over a low base; as has been the case. GDP growth slowed to an 11-year low of 4.2% in 2019-20. The most disturbing news is that the three components of demand have fallen -- consumption demand has slowed, while investments and exports are both in negative territory.

Agriculture and government expenditure came as saviours or the growth rate would have been even lower. Gross value added (GVA) of agriculture increased by 4% and that of public administration and defence by about 10%.

The GVA of the manufacturing sector at the other end grew by just 0.03% last year. The manufacturing sector in fact, has been decelerating for a long time. Manufacturing accounted for 27.5% GDP in 2019, lowest in two decades, showing the share of the sector continues to shrink in the economy despite the government’s Make-in-India push. The industrial and manufacturing sector’s share is down 250 basis points over the past five years.

Back to the question: Is India in a recession? RBI says India has faced a technical recession in the second quarter, but expects to come out of it in the third quarter.

Maybe, it will come out of the technical recession. But still the country will be in a recession -the growth recession - which may be somewhat different in character but its effects are the same so far as growth dynamics are concerned. Growth recession is an expression coined by economist Solomon Fabricant, a professor at New York University, to describe an economy that is growing at such a slow pace that more jobs are being lost than are being added. A growth recession does not reach the severity of a true recession, but still involves a rise in unemployment and an economy that is performing below its potential. The slowing GDP growth figures clearly suggest that India is in growth recession.  


GDP growth (2011-12 prices)













Source: MOSPI, GoI.


But if the debate on India’s economic recovery and its pattern continue, it would be interesting to see where the country’s economy’s growth figures are actually placed vis-a-vis those of its neighbours after the Covid-19. According to data provided by Kaushik Basu, former chief economist of the World Bank, India witnessed the sharpest fall in GDP among 14 Asian countries including Pakistan, Nepal, Sri Lanka, Bangladesh, and Myanmar in 2020. 

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