India’s ever-optimistic equity investors have got a shot in the arm after the pace of vaccinations showed a sharp pickup last week. Faster inoculation is expected to make Indians more confident, triggering an increase in consumption and economic activity.
Equity indices have gained nearly 8% since April on these expectations, although worries over the second wave impact have kept the cheer in check.
The tentative rise in mobility indicators and improvement in e-way bill collections and even electricity consumption all point to an economy already beginning to heal from the second wave.
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Lessons from the first wave are being drawn and India’s producers are surer this time of coming back stronger, notwithstanding the threat of a third wave.
But to what extent will these expectations come true?
Granted, vaccination is the only protection from the pandemic and the faster Indians get inoculated, the quicker restrictions on mobility will be lifted. That would lead to confidence on income and employment, which are the necessary conditions for an increase in consumption demand.
Even so, there are signs that Indians won’t turn eager consumers immediately just from two jabs. Consuming through credit would be even more difficult.
S&P Global Ratings has pointed out that Indians have depleted their savings towards consumption after restrictions were lifted following last year’s nationwide lockdown. As uncertainties over restrictions remain and a third wave threatens, the desire to rebuild these depleted savings may outweigh consumption, the rating agency points out. Bereft of the consumption boost, India’s economy won’t return to its pre-pandemic level soon. Indeed, economic growth forecasts have been pruned for the country.
One indicator that perhaps portends to a slow consumption revival is credit cards. New credit card issuances fell a massive 47% month-on-month in April. This is far higher than the drop during last year’s lockdown. Recall that the current restrictions were less than those of last year.
While this may not necessarily show a weakening trend, a drop such as this spells trouble for credit-fuelled consumption. This means that investors need to add a dash of caution to their expectations when it comes to credit-fuelled discretionary consumption. Unlike the first wave, uncertainties over employment and income are far higher now than before.
Of course, companies and consumers are better prepared than before. That does not negate the fact that discretionary consumption depends to a large extent on how good prospects of future income are. Indians may turn eager consumers only when they are confident that their wallets would remain filled as before.
Meanwhile, economists also point out that the pickup in mobility in rural areas this year is slower when compared to that of urban centres last year during the first wave.
“This has likely been driven by relatively higher health spending by rural India versus the first wave, larger impact on rural residents’ income-generating capacity, and worries about getting infected amid weaker health infrastructure," analysts at Standard Chartered Bank wrote in a 23 June note.
Rural consumption had bolstered the recovery last year even as urban consumers tightened their purses. This time though, the boost from this source would be wanting.
India will get its consumers, but only a couple of quarters later.
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June 29, 2021 at 12:26AM
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Vaccine optimism is lifting markets, but consumption revival still unclear - Mint
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