Second Covid-19 wave a downside risk in Q1, says Finance Ministry

Learning to “operate with Covid-19, as borne by international experience, provides a silver lining of economic resilience amid the second wave”, the report said
The finance ministry on Friday said the second wave of the pandemic had posed a downside risk to economic activities in the April-June quarter of 2021-22.


However, its impact on the economy is expected to remain muted compared to the first wave.


The ministry’s Department of Economic Affairs (DEA), in its “Monthly Economic Review” for April, said “the second wave in India is witnessing a much higher caseload with new peaks of daily cases, deaths and positivity rates and presents a challenge to ongoing economic recovery”.


Pinning hope on vaccines, the report said: “April saw a doubling of global vaccination rates and a concomitant lowering of average transmission rates in countries with high vaccination rates. With vaccines doubly effective in battling the spread and shielding the economy, global co-operation is critical to ensuring availability of vaccines in all countries and addressing inter-country disparities in vaccination rates at the earliest.”


Learning to “operate with Covid-19, as borne by international experience, provides a silver lining of economic resilience amid the second wave”, the report said.


Recognising the second wave impact, it said in April the momentum in economic recovery since the first wave had been moderated. Some high-frequency indicators such as e-way bills and power consumption have shown some sequential moderation in the second half of April, resulting from localised movement restrictions, the report noted.


The report has come at a time when global rating agencies, including Fitch Ratings and S&P Global Ratings, have slashed India’s GDP growth forecast.


Fitch lowered the projection to 9.5 per cent while S&P revised it down to 9.8 per cent.


Talking about the fiscal position, the ministry said the central government had witnessed improvement in the recent months with a revival in economic activities during the second half of FY21.


According to provisional figures, net direct tax collection in FY21 is 4.5 per cent higher than the revised estimates (RE) and 5 per cent higher than in FY20.


Net indirect tax collection in FY21 was 8.2 per cent higher than the RE and 12.3 per cent than the collection in FY20.


Goods and services tax (GST) collection has registered good growth and the mop-up exceeded Rs 1 trillion in each of the last six months.


It also added that GST registered another record high of Rs 1.41 trillion in April, which shows continual economic recovery.


However, the pandemic has hit market sentiment as the Nifty and Sensex recorded losses of 0.4 per cent and 1.5 per cent, respectively, in April, on account of the rupee, which depreciated by 2.3 per cent to reach Rs 74.51. This was mirrored by net foreign portfolio outflows of $1.18 billion in April.


Domestic financial conditions continue to remain comfortable with the Reserve Bank of India’s support to liquidity, with open market operations worth Rs 3.17 trillion done in 2020-21, it said.


While overall financial conditions remained accommodative, the report said, credit growth continued to be muted at 5.3 per cent as of April 9.


Meanwhile, industrial production showed mixed trends. The index of industrial production (IIP) in February 2021 registered a broadbased decline of 3.6 per cent (YoY) and 3.9 per cent against the previous month, the eight-core sector index posted a growth rate of 6.8 per cent (YoY) in March 2021 and 11.1 per cent compared to February 2021.


E-way bills, in terms of value generated, reached Rs 17.36 trillion in April compared to Rs 3.9 trillion in April last year and Rs 14.8 trillion in April 2019. Growth since April 2019 showed an increased formalisation of the economy, the report highlighted.


On sectoral performance, the report said agriculture continued to be the silver lining with record foodgrain production estimated in the ensuing crop year on the back of predicted normal monsoons.


Rural demand indicators like tractor sales recorded a growth rate of 172 per cent and 36 per cent on a low base in March 2020 and even the pre-Covid month of March 2019, respectively.


Latest data on corporate earnings signals a manufacturing turnaround in Q4FY21, with 12.5 per cent growth in net sales and a 9.5 per cent rise in income for a sample of 213 companies.


Digital payments continued to gain momentum in April with UPI transactions volume and amount more than doubling previous year levels.


On market borrowing plan, as on 23 April, the Centre has raised Rs. 0.49 lakh crore as gross market borrowings, which is 26 per cent higher than the corresponding period in FY 21.


However, a broad-based rise in commodity prices poses inflation risk. CPI-combined inflation rose to 5.52 per cent, mainly on account of high food inflation. WPI inflation increased to an 8-year high of 7.39 per cent, led by oil and metal prices as well as base-effect, exceeding its CPI counterpart after nearly two years, it said.


Softening food and fuel prices, with normal monsoon and expected supply easing of food products, may provide succour to a potent risk of rise in input prices surfacing as retail inflation, the report said.


Mixed economic trends

  • Manufacturing PMI was at 55.5 in April, a slight improvement over 55.4 in March
  • E-way bills reached Rs 17.36 trillion in April, compared to Rs 3.9 trillion in April 2020
  • Gross GST revenue collection was at a record high of Rs 1.41 trillion in April
  • April saw net FPI outflows of $1.18 billion on account of market sentiment and rupee depreciation
  • Imports grew 166% YoY in April; exports grew 197%
  • Core sector posted 6.8% YoY growth in March, and 11.1% compared to February
  • Credit growth continued to be muted at 5.3% as of April 9

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