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Indian economy charges past prepandemic level

Global Chip And Energy Shortages Threaten Lasting Comeback

Screenshot 2021-10-19 143401
A crowded market in Mumbai: India hit a new global record of over 410,000 daily infections earlier this year, but the figure has since fallen to under 20,000.   © Reuters

 India's economy is now doing better than before the start of the COVID-19 pandemic, an index compiled by Nomura Singapore shows, as the South Asian country overcomes a mass outbreak that brought its health care system to its knees earlier this year.

But chip and energy shortages have begun to impact India's manufacturing sector, casting shadows over the path to a full and lasting recovery. Farmer protests, once again picking up momentum after a coronavirus-induced lull, could also lead to widespread supply chain disruptions.

The Nomura India Business Resumption Index has topped the prepandemic level of 100 -- set in late February 2020 -- for ten straight weeks since mid-August, reaching a new high of 108.8 in October. The index tracks such factors as movements of goods and people, the labor force participation rate, and electricity demand.

"The main component that has led to NIBRI moving to prepandemic level is mobility," said Sonal Varma, Nomura's chief economist for India and Asia ex-Japan.

"Our baseline view is that a recovery will continue, although it may continue to be bumpy. It continues to be driven by the industrial sector, investments and faster exports, whereas services and consumption are the laggards," she said.

With the spread of new, more contagious variants of the virus behind COVID-19, India hit a global record of 410,000-plus daily new cases in early May. An acute shortage of hospital beds and medical oxygen hamstrung its health care system, and many regions were forced to lock down.

But recent progress with vaccination has dramatically slowed the spread. New daily cases are now less than 20,000, and economic activity is bouncing back.

India's Index of Industrial Production rose 11.9% on the year in August. Goods and services exports together jumped 21.4% on the year in September, with coffee as well as gems and jewelry faring well. Meanwhile, the consumer price index increased 4.3% on the year that month, falling below the 6% upper target set by the Reserve Bank of India.

The RBI expects real gross domestic product growth of 9.5% for the fiscal year ending March 2022, bouncing back from a coronavirus-induced record drop of 7.3% the year before.

Still, uncertainty looms large over India's hopes for a full economic recovery.

The country has been hit particularly hard by the global semiconductor shortage, since its manufacturing sector is relatively weak and cannot make up the shortfall on its own. Maruti Suzuki India, the nation's largest automaker, roughly halved its output on the year in September over a lack of chips.

The growing energy crunch is further cause for concern. India relies on coal for roughly 70% of its electricity, much of it mined at home. But while the demand for energy surges as the economy reopens, coal inventories at Indian power plants are at a record low, owing partly to heavy rains in September. Certain parts of the country, like the northern state of Punjab, are already experiencing power outages.

In addition, farmer protests triggered by new legislation to liberalize the agricultural sector are regaining steam. The demonstrations began in late November 2020 and had eased up around April and May amid the surge in COVID-19 cases. But farmers have stepped up picketing on highways around New Delhi and elsewhere, and prolonged protesting could impact India's supply chains.