India’s ever-optimistic equity investors have got a shot in their arm after the vaccination speed showed a sharp pick up last week. Faster inoculation is expected to make Indians more confident, triggering an increase in consumption and economic activity.
Equity indices have gained 7.8% since April on these expectations although the worries over the second wave impact have kept the Street's 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. 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?
True, 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. Borrowers would be even more difficult to find.
Global rating agency S&P Global Ratings has pointed out that Indians have depleted their savings towards consumption after restrictions were lifted following last year’s national 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 economic growth would be limited to 9.5%, instead of earlier double-digit predictions, the agency has said. Indeed, economic growth forecasts have been pruned by everyone for the country and further cuts cannot be ruled out.
Yet another worrying sign is the sharp drop in credit card issuance. The total pile of credit cards issued fell a massive 47% month-on-month in April. This is far higher than the drop last year during the nationwide lockdown. Recall that the current restrictions were less than those prevalent during the nationwide lockdown. While this may not necessarily show a weakening trend, a sharp drop such as this portends 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 the confidence over demand. Indians may turn eager consumers only when they are confident that their wallets would remain filled as before.
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June 28, 2021 at 12:51PM
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Vaccine optimism lifting markets but jury still out on consumption - Mint
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