Retail sales of consumer merchandise and automobiles have seen a sharp spike in the recent past. Influenced primarily by the ongoing festive season, the data heralds good news after a woeful start to the current financial year. In addition to festival related sales, the trend is also likely to have been influenced by a gradual restoration of normalcy after the lockdown in April and May, and the kharif harvest. The larger question the data raises is about the durability of the current trend. Is the economy in the midst of a ‘V’ shaped recovery?
Any comparison with the April-June quarter will be misleading. It was influenced by one of the harshest lockdowns in the world. A more relevant measure will be a comparison with the preceding year, after accounting for the fact that Covid-19 infections continue to rise and voluntary physical distancing is a drag on economic activity. In this context, RBI’s forecast of a three-speed recovery influenced by the pace of opening up seems most realistic. Also relevant is that the central bank this month forecast that the economy will contract by 9.5% in 2020-21, with risks tilted downwards. Therefore, it’s prudent not to read too much into the festival sales data.
The Covid-19 crisis has come on the heels of two successive slowdown years. There’s a possibility that some of the damage in terms of lost jobs is long lasting. Risk aversion displayed by banks awash in liquidity is an indicator of the underlying trend. Therefore, it’s essential that the government step in with a calibrated fiscal package to minimise the long-term economic damage. At this stage, the fiscal package can also help address some of India’s infrastructural deficit. This will feed into the reform measures announced since May. There’s work to be done.