India has been under lock down due to the COVID -19 pandemic since March, 25th, 2020. The lock down has been stringent for the first months with the first set of relaxations announced from April 21st, 2020. This lock down is expected to have severe impact on the economy. From May there has been gradual relaxations.
The Ministry of Statistics and Programme Implementation (MOSPI) , Government of India announced the IIP growth numbers and the Core sector growth figures for June on August , 10th and July, 31st respectively. Reserve Bank of India (RBI) has announced the sectoral credit growth numbers for June on July,30th. Centre for Monitoring Indian Economy (CMIE) is publishing the unemployment numbers in regular intervals. Let us examine how the Indian economy has been impacted by this lock down.
IIP and Core Sector Growth
Both the IIP and the Core sector witnessed negative growth in the month of June. However the extent of negative growth has seen a continuous decline for the last three months. However as compared to June, last year, both the IIP and core sector growth has been significantly lower. So while the economy has seen more activity in June compared to previous two months, it is still far away from normal and still sees a significant negative growth in the month of June also.
It needs to be noted here that in view of the preventive measures and announcement of nation-wide lockdown by the Government to contain spread of COVID-19 pandemic, majority of the industrial sector establishments were not operating from the end of March, 2020 onwards. Moreover the estimated of June 2020 are quick estimates and may be subject to change in subsequent months.
The growth of all the sectors showed some improvement with respect to the previous two months but continued to show a decline as compared to last year same month. Manufacturing sector, which is one of the most people intensive sectors showed significantly lower negative growth as compared to the previous two months. It needs to be noted here that manufacturing sector contributed to almost 80% of the total IIP.
Similar pattern is witnessed in terms of Core sector growth. Steel industry has witnessed the severest burnt in the stringent lock down month. Apart from the fertilizers sector, all other sector continued to show negative growth in June. It should we be noted that compared to the growth rate of May, all sectors apart from coal and fertilizer saw an improvement in growth rate in June. The COVID -19 pandemic has very less impact on rural India and hence agricultural activity continued to function since April, 21st. Given this there has been a need of fertilizer leading to higher production and hence positive growth in that sector. All other sector did not witness such stream of demand and hence continued to show a decline in growth.
In order to combat the impact on economy due the pandemic induced lock down, the Government of India and the Reserve Bank of India announced an economic package. A sizable section of the economic package announced by the government and the central bank is targeted to provide more liquidity and credit in the economy. The first set of such policies was announced by RBI in March 28th and then again around mid April. Government of India announced such measures in mid May. Many economists believe that with lack in demand in the economy, there might not be a higher credit off take even after those measures. Let us examine what has been the scenario in terms of credit growth.
The sectoral credit growth rate showed either a marginal decline or remained same in the month of May, 2020 as compared to the growth rate of April, 2020 for almost all the sectors. There has been an increase in growth rate in credit growth of industrial sector compared to the growth rate of previous two months. However when compared to July, 19 then all sectors witnessed a severe decline in credit growth. The decline has been severe for personal loan segment. The personal loan growth is a reflection of demand in the economy and a decline in this reflects lack of demand in the economy. However within the retail loan sector, there has been a surge in auto loan. There has been a considerable decline in all other type of retail loans.
As we see a surge in credit growth of industry sector from the previous two months, let us examine what is driving this. A host of credit measures were taken focusing on the small and medium enterprises. It needs to be noted here that both the micro and medium industrial sector which actually is a source of employment for vast majority witnessed a decline in credit growth. Only the large industrial segment witnessed a positive growth.
The decline in credit growth for small, micro and medium sized industry segment has been more severe in June as compared to the previous months. The large industries have a higher growth in June. So the small, micro and medium industry sector which is one of the most people intensive sectors does not show a credit uptake at least till June During mid of May, a host of credit schemes targeting this sector has been announced by the government. However apart from the large industries, there is no significant impact of the measures at least till June. It remains to be seen how it impacts in the coming months.
Car and Two Wheeler Sales
Month of July has seen a significant growth in both car and two wheeler sales as compared to the previous month. This is a reflection of the fact that there has been significant surge in economic activity after unlock 1 starting from June, 1st. However the sales numbers of both cars and two wheeler has been significantly lower when compared to July, 19. So while there is signs of recovery in the month of July as compared to the previous three months, it is still much lesser than the pre-corona level. It needs to be noted here that both the car sales and two wheeler sales declined in previous financial year as compared to the earlier years.
The IIP figures and the credit growth numbers suggest slump in the manufacturing sector and small and micro enterprises. Both these sectors are people intensive sectors and can have severe impact on unemployment levels. However agriculture sector has been functioning. Moreover additional budget has been allocated to MGNREGA for ensuring more employment, Let us see what has been the impact of unemployment trends.
The unemployment rates had seen a record increase in the month of April and May. However with the unlock 1 starting from June, 1st, there has been a significant decline in unemployment rate in the month of June, 2020. It further declined in July. The unemployment rate for rural India is comparable with the unemployment rate one year back. But for urban India the unemployment rate in July, 2020 is still more than 100 basis points higher than that of July, 2019. The urban centers are still fighting with COVID and there are intermittent lock downs and restrictions.
It needs to be noted here that the unemployment levels in the pre-corona level has itself been in the higher side. The overall unemployment rate which stood at 2.3% in 2011-12 showed a record increase to 6.1% in 2017-18, highest in 45 years. This showed a marginal decline to 5.8% in 2018-19. So overall the unemployment rate which has been in a higher side sees a further growth given this pandemic.
The GDP growth numbers for first quarter ( April- June) FY 2020-21 is supposed to be announced end of August. Given the negative growths in IIP and core sector growth and also a decline in credit growth mainly in the retail sector, it is highly likely that the first quarter GDP growth will be negative. IPD forecasts it to be between -4% to – 6%. The economic activity are slowly rising in the country which is reflected in the decline in the extent of negative growth of IIP and core sector growth over last three months. So over time economy will slowly show signs of moving to a positive growth trajectory. However how fast this will happen will depend on the spread of the disease which may lead to further lock downs. Indian economy witnessed a slowdown since FY 18-19. Now the pandemic induced lock down has has got added over this. It is of utmost importance to constantly monitor the economy and take effective actions and policies.