On August 13, India’s benchmark stock market index, the BSE Sensex, broke through another psychological barrier, crossing the 55,000 mark. This occurred in the middle of the current fiscal year’s second quarter. Stock markets are supposed to reflect future optimism (or lack thereof) about an economy, assuming they are not thriving on a bubble. In the week ending August 15, the Nomura India Business Resumption Index (NIBRI) surpassed the psychological threshold of 100. A NIBRI value of 100 corresponds to pre-pandemic economic activity levels. This suggests that current economic activity is approaching, if not already exceeding, pre-pandemic levels.
So, has the Indian economy finally recovered from the effects of the pandemic? When we look at other recently released macroeconomic indicators, the answer to this question is less encouraging. In fact, they emphasise the importance of focusing on reviving the economy’s mass demand.
The lack of demand will continue to stifle ‘animal spirits.’
Tarun Bajaj, the revenue secretary, spoke to members of the Confederation of Indian Industries on August 12 and asked why private investment was lagging despite strong corporate performance (in terms of profits). Private capital only invests when it expects to profit from it. Profits are determined by sales, which are determined by demand. Investment is only justified when existing production capacity is deemed inadequate to meet current or future demand, unless it is made to offset depreciation of existing plant and machinery (or capital stock). It is this constraint, not some hidden agenda, that motivates me.
On this point, the most recent round of the RBI’s Industrial Outlook Survey (IOS) provides conclusive evidence. One of the survey’s questions asks respondents about their perceptions of production capacity adequacy (or lack thereof) at the time of the survey and their expectations for the next six months. The statistic that stands out in the survey results is not the current assessment of production capacity adequacy, but the future assessment of it.
For the second quarter (July-September) of 2021-22, an unprecedented 28.4 percent of respondents believe their current production capacity is more than adequate. The most recent IOS round took place between April and June. The perception of future production capacity being more than adequate is notable because it has risen significantly since the first lockdown and subsequent first wave of Covid-19 infections, which peaked in September 2020. This could be a result of the economy’s demand-side damage taking longer to manifest.
The IIP numbers for the June quarter show that discretionary demand has been harmed.
After a pandemic-like shock, some economic recovery is inevitable because things will return to normal. When restrictions are lifted, for example, people will get haircuts and children will buy school uniforms. This is referred to as “pent-up demand.” What matters for a long-term recovery, however, is whether or not there is any damage to what’s known as discretionary demand. This can happen when consumers start cutting back on non-essential spending as a result of current and future income constraints. This would include a new car or television, as well as a family vacation.
