(MENAFN- IANS) By Rohit Vaid
New Delhi, June 29 (IANS) Predictions of a possible third wave of Covid-19 along with high inflationary pressure are expected to hamper the pent-up demand in 2021, economists said.
At present, India suffers from a resurgence of Covid cases. However, a sharp decline in new infection rate has triggered hopes of economic normalisation.
In contrast, low consumer sentiment as well as falling household income levels amid job losses will negatively impact the off-take of several sectors.
Consequently, the current situation has led various multilateral organiations to revise India's GDP growth rate downwards.
"Overall, we expect discretionary spending on consumer durables and areas such as home improvements may be limited in the near term, following the spending that took place last year," said ICRA's Chief Economist Aditi Nayar.
"Moreover, revival of spending on contact-intensive services will take a cue from the vaccination progress," Nayar added.
Besides, industry insiders portend that high inflation has countered the positive effects of ultra low interest rates.
Resultantly, in spite of re-stocking activities that has propped up GST collections, along with record low interest rates, might not sway many consumers to make discretionary purchases this time around.
Additionally, fears of a possible third Covid wave have kept purse strings tightened, the experts said.
"The fall in most high-frequency indicators was not as steep as last year, thus the pent-up release was also not as sharp. The quasi lockdowns were less stringent this time around, implying the supply constraints were not as tight unlike last time," said Madhavi Arora, Lead Economist, Emkay Global Financial Service.
"The recovery ahead (just as last year) may also be led by capital and profits and not by improving labour markets and wages. The top 20 per cent of the income bracket has not been impacted as much, which could still drive discretionary spending," Arora said.
Similarly, economy watchers said that despite healthy pick-up in luxury and FMCG segments, sequential growth will majorly depend on the rate of vaccination and the government's efforts to mitigate another wave of the pandemic.
Even the recent ultra-high frequency led indicators have only shown a marginal turnaround in economic activity.
Furthermore, e-way bills, railway passenger movement, rail freight, traffic congestions appear to bottom out albeit in a more contained manner than in the year ago period.
"The sustainability of the pent-up demand, however, will clearly depend on the likelihood and severity of the third wave and importantly, the speed of vaccination in the country over the next few months," said Suman Chowdhury, Chief Analytical Officer at Acuite Ratings and Research.
"The silver linings in the form of a strong support from global economic growth, likelihood of a normal monsoon, and impetus from an accommodative policy backdrop should aid sequential recovery in industrial and commercial activity in Q2FY22 provided there are no fresh surprises on the Covid front," Chowdhury said.
But the major stumbling block to a pent-up led recovery might come from the sequential decline in household savings as a percentage of GDP.
The latest data from the Reserve Bank of India indicates that there has been a sequential decline in household savings as a percentage of GDP in Q3FY21 from the highs of Q1 or Q2.
On an absolute basis, however, net household savings have actually gone up by 5.9 per cent YoY from Q3FY20 to Q3FY21.
According to M. Govinda Rao, Chief Economic Adviser, Brickwork Ratings: "The household savings, particularly financial savings, have been volatile. An important adverse consequence of the pandemic has been increased inequality. The low income sections of people and the unorganised sector have substantially lost out, but the main saving sections are much less affected.
"So far, they have not had enough avenues to spend and saving was high particularly in the quarters when lockdowns were in place. However, in a situation where the economy is demand constrained and bank lending for the businesses is low, a temporary decline in the savings should not be a matter of concern."
(Rohit Vaid can be contacted at )
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