Gradual unlocking of state restrictions spurs incomplete recovery in June 2021: ICRA


    Rating agency ICRA highlighted that while the phased lifting of state-wise restrictions has ushered in a recovery in the economic momentum, the performance of most high frequency indicators in June 2021 remained below the pre-Covid levels of June 2019, as well as April 2021, i.e. before the peak of the second wave.

    According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “With the normalisation of the base related to the unlocking after last year’s stringent nation-wide lockdown, the year-on-year (YoY) performance of 13 of the 15 high frequency indicators expectedly flattened in June 2021, relative to May 2021. More importantly, several indicators recorded a sequential improvement in June 2021, as the states started lifting restrictions with the subsiding of the second wave of Covid-19. While this confirms that a revival has set in, volumes for most non-financial indicators in June 2021 were weaker than the levels in both April 2021 and June 2019, suggesting that the recovery is incomplete,” added Ms. Nayar.

    The rating agency highlighted that the momentum improved on a sequential basis for 10 of the 13 non-financial monthly indicators during June 2021. This sub-set includes vehicle registrations (+127.2%), automobile output (109.9%), generation of GST e-way bills (+36.8%), consumption of petrol (+21.0%) and diesel (+12.0%), non-oil merchandise exports (+5.8%), and electricity generation (+2.9%).

    To gauge the strength of the recovery, ICRA compared volumes across sectors in June 2021 with both June 2019, i.e. the pre-Covid level, as well as April 2021, i.e. prior to the peak of the second Covid-19 wave. Discouragingly, volumes in June 2021 trailed the June 2019 level for eight of the 13 non-financial indicators, and were weaker than April 2021 for nine indicators, highlighting that while a recovery has undoubtedly set in, it remains incomplete.

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    ICRA noted that diesel consumption stood out as the only indicator recording a contraction in YoY terms in June 2021, which reflects some shift of freight to the Railways amidst all-time high diesel prices, and tariff and non-tariff measures taken by the Indian Railways in August 2020 to boost the operations and improve efficiency.

    Given the further relaxation by many states in the ongoing month, we expect volumes to improve in sequential terms in July 2021. Encouragingly, the daily average generation of GST e-way bills has risen to 1.9 million in the first 11 days of July 2021 from the 1.8 million reported in the month of June 2021. Moreover, the electricity demand data released by POSOCO reveals that the pace of YoY growth rose considerably to 17.7% in July 1-13, 2021 from 8.4% in June 2021. However, this coincided with a lull in the rains, and its sustenance at such a high level remains uncertain,” added Ms. Nayar.

    Given the distorted base of Q1 FY2021, ICRA has compared the volume performance in Q1 FY2022 with Q1 FY2020, which reveals a decline in 11 of the 14 non-financial indicators (including quarterly CV output). This confirms the rating agency’s expectation that the real GDP in Q1 FY2022 will trail the Q1 FY2020 level, while recording a double-digit YoY expansion. Only rail and port cargo traffic, and non-oil merchandise exports improved in Q1 FY2022, relative to Q1 FY2020, reflecting the robust trade with the economic rebound in major trading nations, as well as improved efficiency in rail operations.

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    The monthly indicators tracked by ICRA include the production of passenger vehicles, motorcycles, scooters, vehicle registrations, output of Coal India Limited, electricity generation, non-oil merchandise exports, ports cargo traffic, rail freight traffic, generation of GST e-way bills, domestic airlines’ passenger traffic, consumption of petrol and diesel, aggregate deposits and non-food credit of scheduled commercial banks. Apart from the aforementioned indicators, the quarterly analysis also includes the production of commercial vehicles.