Economists refer to the tendency to remember the most recently presented information best as the recency effect. The recency effect will be at play when it comes to India’s economic situation in the time of Covid-19.
As months go by and the economic situation deteriorates, there will be more and more talk about the economic crisis, initiated by the steps taken to prevent the spread of Covid-19. We will be told that it was the cost we had to pay in order to save lives (and which is true). In the process, what will be forgotten is the fact that India’s economic situation was deteriorating all through last year and this year, even before Covid-19 struck.
In this scenario, it is important to put this on record. Let’s take a look at a few economic indicators for which data is available for much of the period between April 2019 and March 2020, the last financial year.
Car sales: Car sales are a reasonably good indicator of which way urban consumption is going. They fell by 23.6 percent to 16.95 lakh in 2019-20. This fall was not entirely because of the negative impact of Covid-19. How can we say that? The sales between April 2019 and February 2020 had fallen by 21 percent to 16.12 lakh units compared to the period between April 2018 and February 2019. This clearly shows the lack of confidence that people had in their economic future even before Covid-19 struck.
It is important to mention here that no car company makes everything on its own. Hence, a slowdown in car sales leads to a slowdown in tyre sales for new cars, steering sales, steel sales for manufacturing cars, etc. It also leads to a slowdown in auto loan growth of banks and non-banking finance companies.
Two-wheeler sales: Two-wheeler sales (motorcycles, scooters and mopeds) fell by 17.8 percent to 1.74 crore units. In fact, if we look at the first 11 months of 2019-20, sales had fallen by 16.2 percent to 1.66 crore. This again tells us that things were not exactly hunky-dory even before Covid-19 struck. Slowing two-wheeler sales is a very good indicator of both urban as well as rural consumption slowing down. It shows the lack of confidence that people have in their economic future or in their ability to pay the EMI if they take on a loan or to make an upfront down payment to fund the two-wheeler purchase.
Tractor sales: Tractor sales are a good indicator of the economic confidence of the rural rich. The data for domestic sales of tractors for March 2020 is yet to be published. Tractor sales for the first 11 months of 2019-20 fell by 14.1 percent to 6.5 lakh units. Clearly, tractor sales were down even before Covid-19 struck.
Commercial vehicles sales: An increase in sales of commercial vehicles signals robust activity on the infrastructure and industrial front. Commercial vehicles are used to move around finished as well as semi-finished goods. In 2019-20, commercial vehicles sales fell by 28.8 percent to 7.18 lakh. The sales during the first 11 months of 2019-20 had fallen by 21.5 percent to 7.05 lakh. Sales in the month of March crashed by a whopping 88 percent.
Revenue earning rail-freight: The bulk of the freight operations of the Indian Railways is concentrated around moving certain commodities like coal, pig iron, cement, petroleum, fertilizers, iron ore, etc. If the Railways is moving more of these commodities around the length and breadth of this country, it’s a good indicator of investment and industrial activity picking up. In 2019-20, revenue earning rail freight fell by one percent to 1,210.46 million tonnes. In 2018-19, this indicator had gone up by 5.3 percent. How did things look during the first 11 months of 2019-20? Revenue earning rail freight had gone up by 0.4 percent to 1,107.5 tonnes. Clearly, things weren’t well before March 2020.
Finished steel consumption: The creation of any new physical infrastructure requires steel. Hence, a faster increase in steel consumption than in the past shows increased investment activity than in the past. In 2019-20, the consumption of finished steel went up by just 0.7 percent to 99.4 million tonnes. In 2018-19, the consumption increase had stood at 8.8 percent. During the first nine months of 2019-20, the steel consumption had gone up by 3.9 percent to 92.7 million tonnes. This was slower than the previous years.
Non-food credit: The non-food credit lending growth stood at 6.1 percent in 2019-20, the lowest since 1993-94, when it was at 5.70 percent. It’s also the third slowest growth in non-food credit in the last 60 years. The slowest growth had happened in 1961-62 and was at 5.4 percent.
The banks lend money to the Food Corporation of India and other state procurement agencies to buy rice and wheat directly from farmers, primarily to meet the country’s food security needs. Once this lending is subtracted from the overall lending of banks, what remains is non-food credit. Non-food credit growth was already collapsing even before Covid-19 struck, being at its third slowest in 60 years.
During the first 11 months of 2019-20, the non-food credit growth stood at 3.4 percent. In comparison, during the same period in 2018-19, the non-food credit growth had stood at 10.4 percent. What this tells us is that Indian banks weren’t in the mood to lend even before Covid-19 struck.
Gross tax revenues earned by the central government: If the economy is doing well, the government earns more taxes and vice versa. The gross tax revenues for March 2020 are yet to be published. The gross tax revenues earned by the central government between April 2019 and February 2020, the first 11 months of 2019-20, fell by 0.9 percent to Rs 16.78 lakh crore. During the same period in 2018-19, they had risen by 7.9 percent to Rs 16.92 lakh crore. A slowdown in tax collections is a good indicator of a slowdown in overall economic activity. It’s also a reflection of a cut in corporate income tax rates, which happened in 2019-20.
What all this tells us very clearly is that the Indian economy was in a mess even before March 2020. In the days to come, this mess will limit our ability to successfully fight the negative economic impact of Covid-19. Of course, pretty soon, a small industry of economic commentators will emerge who will try blaming everything on Covid-19. Dear reader, please be aware of this.