Elusive recovery

Industrial output contracted for the second straight month in February, according to latest data released by the National Statistical Office. But even more disconcerting is that the pace of contraction at 3.6 per cent (down from 0.9 per cent in January) was deeper than what was expected. This is now the sharpest contraction in the index of industrial production (IIP) since August last year. In fact, from September 2020 to February 2021, industrial production has risen only marginally by 0.1 per cent, signalling that a durable, broad-based recovery in volumes is yet to materialise.

Manufacturing, which accounts for 77.6 per cent of this index, declined by 3.7 per cent in the month of February. Of the 23 sub-sectors within manufacturing, 17 turned negative in February. In fact, on a use-based classification, five of the six segments, such as capital and infrastructure/construction goods, contracted in February, as opposed to three in January. These trends would suggest that the marginal uptick in volumes observed around the third quarter of the previous financial year was more on account of inventory re-stocking to meet the festival and pent-up demand. But from here onwards, considering that the imposition of the national lockdown towards the end of March last year had dragged down economic activity sharply in the period thereafter, the strong base effects will distort economic data. This will impart an illusionary boost to performance, despite the localised restrictions that are being imposed by various state governments to deal with the surge in COVID-19 cases.

The recent spike has raised concerns over the economic recovery, especially with the imposition of harsher restrictions on activities now being a possibility. The restrictions currently being imposed by several state governments are as of now limited to night curfews and weekend lockdowns. While these are less stringent, and therefore economically less painful, they will nonetheless impact business, and thus delay the economic recovery process. Reports suggest that some migrant workers have already begun returning to their hometowns and villages. If the situation worsens, harsher measures cannot be ruled out. In fact, the Maharashtra government has announced a two-week curfew, though it may not be as harsh as the one imposed last year. However, policymakers should not lose sight of the fact that we are better equipped to fight the virus compared to last year. At this juncture, the primary objective of governments, both at the Centre and states, should be to ramp up the vaccination drive.