Covid resurgence may throw a spanner in rebounding demand

At a time when green shoots had begun showing up in the economy, the resurgence of Covid infection across the country is indeed bad news. According to the latest numbers released by the Union Health Ministry, the country has just recorded the highest single-day rise recorded in 111 days.

The renewed intensity in infection has some of the state governments, particularly Maharashtra, actively considering enforcement of lockdown once again. The date for the reopening of educational institutions have again been changed to March 31, while restrictions in social gatherings and entertainment venues have been reintroduced.

The economy’s shift into the reverse gear is likely to retard the release of pent-up demand, which had started occurring in right earnest as the Covid situation seemed to be getting under control. In fact, the big drop in the rate of new infection and the increased speed in the recovery of existing cases had led to a sense of complacency, which incidentally has contributed to the resurgence in infection.

The revival of demand, particularly in some key sectors, had revived optimism, with an upward revision in the overall annual GDP numbers, from a negative 24 per cent in the first quarter of the year to only 7 per cent less.

Similarly, both Industrial Production (IIP) and Purchase Managers Index (PMI) indicated recovery, with a proportionate increase in the collection of GST. Although the retail sector did not yet show the desired momentum, there were signs of improvement as access to products and services became easier and restrictions in travel were off to a large extent.

The biggest improvement was, of course, predicted in the automobile sector, which had gone through a rough patch even before the pandemic set in. The passenger vehicle volume had dropped 18 per cent in 2020 and was undergoing one of the longest protracted slowdowns in three decades, before the lockdown-related disruption further compressed the volumes.

Various consultancies have since forecast that the passenger vehicle sector will not only pick up steam, but record a 15-20 per cent improvement over the previous year. In fact, the Indian industry is supposed to outperform the global average, including the figure for the US market, which is expected to see a real turnaround this year. The pickup in demand would be on account of replacement purchases as also new acquisitions, which is always a momentum growth area in India.

According to the Society of Indian Automobile Manufacturers (SIAM), the auto industry registered a 5.97 per cent sales growth in India last month as compared to January 2020. A total of 1.7 million units were sold last month as opposed to 1.6 million in January 2020.

As per SIAM, four-wheeler sales in January this year increased to 2.76 lakh units from 2.48 lakh units in the same period last year, marking a, 11.14 per cent growth. The most impressive performance was by the SUV segment, which increased by more than a third, although hatchbacks and sedans registered a small drop of a couple of percentages.

Management consultancy KPMG had last year forecast that the pandemic would lead to changes in the demand patterns in the automobile sector, induced by marked changes in consumer habits and behaviours. The consultancy forecast a shift away from shared mobility options as people prioritise social distancing and personal hygiene.

This would effectively translate into a higher preference for affordable personal mobility, which could boost sales for auto manufacturers, especially in the entry-level vehicles category, it pointed out, citing a similar trend in China, where car ownership gained traction vis-a-vis car-hailing and sharing. The agency argued that this could help reverse the declining sales trend in the automotive sector in India. And that seems to have happened.

KPMG had stressed that the most damaging and lingering effect of the pandemic was the psychological impact and argued that the thrust to revive growth would have to come from government-driven expenditure as private investment, consumption-led demand and exports were all looking weak.

While there could be two opinions about whether the government initiatives have succeeded to provide the required traction, some green shoots have started appearing in the economy, especially in terms of power generation and some core industrial activities.

(IPA Service)

Views expressed are personal