In case anyone needed the reminder, global economies are currently facing the most unprecedented shock in post-war history in the form of the Covid-19 pandemic.

In India, ever since the sudden lockdown brought all economic activity to a screeching halt, all hopes of a turnaround have come to be pinned on an easing of restrictions.

Easing began in May in stages and for some time, economic data was showing signs of a recovery in business activity. But as the lives-versus-economy dilemma enters a more critical stage, these signs are now waning.

Even as the government clutches at straws in search of potential game changers, the gradual easing of lockdowns has sparked hope in some quarters. But what will come to the economy’s rescue after the reopening relief fades, remains entirely uncertain.

High-frequency indicators like purchasing managers’ surveys and fuel sales show growth dipping in July, pointing to weak business activity. India’s manufacturing PMI contracted at a quicker pace in July than a month prior and was one of the worst globally. Bank credit shrank and tax collections too moderated during the month. The improvements in the jobs scene also tapered off, according to the Centre for Monitoring India Economy.

Persisting fundamental weaknesses

Any improvement in economic data that we may have seen recently is just a reflection of normalisation following extreme lows; it is unlikely that India’s macroeconomic fundamentals has seen any such improvements, according to Prachi Mishra, chief India economist, Goldman Sachs.

Mishra adds that credit rating agencies appear concerned about India’s administrative and fiscal ability to implement large-scale support. While India could get a boost in 2021 due to policy support and pent-up demand in advanced economies, she is of the view that there is no domestic fundamental force to drive India’s GDP.

With the country still battling persisting fundamental weaknesses, Mishra sees real GDP contracting by 4.4 per cent in FY21 — the deepest recession since 1980.

One reason according to her is that the government’s capacity for countercyclical policy is curtailed due to fiscal dominance during normal times: “The price of not saving and investing in an umbrella when there is sunshine is that we have to bear the costs when it is raining.”

What will August 31 show?

Amid the mad worldwide scramble for a vaccine, some of the economic pessimism has lately been offset by green shoots in the global economy — nascent signs that global GDP is gradually rising again. But whether India will also move in lockstep with other economies is anybody’s guess.

At the moment, most GDP estimates for India in 2020 paint a bleak picture of sharp contraction. The World Bank projects 3.2 per cent contraction, while the International Monetary Fund pegs it at 4.5 per cent and the Asian Development Bank at 4 per cent. Nomura estimates growth at (-)5.2 per cent, and Icra recently revised its forecast for contraction in the current fiscal to 9.5 per cent.

To make matters worse, the economy’s deepening travails have coincided with a sharp uptick in Covid-19 cases, especially since reopening began in May. India now has over 23 lakh cases — the third in the world in Covid cases behind Brazil and the US. The worsening situation forced states to impose localised shutdowns in July to curb the outbreak.

Monetary manoeuvres are also falling short. Despite the widely accommodative monetary policy stance of reducing repo rate by 115 bps, liquidity injections and fresh regulations over the past few months, RBI’s actions have at best been average compared to the policy support being provided by other central banks.

GoI is likely to announce fresh measures in the coming days, including big-ticket infrastructure projects and policy changes, to make local industry more competitive, as part of efforts to rebuild the economy. As for the question of whether or not the earlier set of measures have had any impact, the Q1 GDP figures coming on August 31 will put things in perspective.