The third wave of Covid-19 in India, which was driven by the Omicron variant, peaked on January 25 and while deaths were low, it derailed economic activity in contact-intensive sectors. High frequency indicators like PMI showed minimal economic impact, but IIP numbers paint a more sober picture of manufacturing growth. The damage to small firms from rising input costs could explain the divergence between resilient PMI and weaker IIP figures, and GDP numbers may continue to not fully reflect struggles of small enterprises and households in the uneven K-shaped recovery.

1. The third wave of Covid-19 in India, which
was primarily driven by the Omicron
variant of the virus, peaked on January 25.
While the impact of the third wave in
terms of deaths was very low, the surge in
infections did derail economic activity,
especially in contact intensive sectors. This
is likely to have had some adverse impact
on the economic momentum. When NSO
published second advance estimates for
GDP in 2021-22 in February, annual GDP
growth was projected at 8.9%. These
numbers assumed an annual growth rate
of 4.8% in the quarter ending March. A
Bloomberg forecast of economists
expects the March 2022 quarter growth to
be 3.8%. For fiscal year 2021-22, GDP
growth is expected to be 8.8%.
1What was the impact of the Omicron wave
on the economy?
QUARTER-WISE GROWTH NUMBER AND PROJECTION
High frequency indicators such as
Purchasing Managers’ Indices (PMI)
suggest the economic impact of the
third wave is likely to have been minimal.
PMI for neither manufacturing nor
services went below the psychological
threshold of 50 between January and
March. A PMI value below 50 signals a
contraction in economic activity
compared to the previous month. In fact,
PMI value for both manufacturing and
services suggest that the economic
momentum has continued into the
month of April. This suggests that formal
sector activity, which is what the PMI
numbers are more likely to capture, did
not suffer much during the third wave.
2High frequency indicators such as PMI paint
a much better picture
PMI MANUFACTURING AND SERVICES
A look at Index of Industrial
Production (IIP) data for the
quarter ending March shows that at
least in manufacturing sector, things
might not be as bright as PMI numbers
show them to be. On a year-on-year
basis, the manufacturing component
of IIP — it has a weight of 77% in the
overall IIP — grew at just 0.95% in the
quarter ending March. To be sure,
some of the sequential moderation in
quarterly growth numbers for IIP is
also on account of dissipation of a
favourable base effect. However, it
does not take away the fact that
manufacturing output has not shown
much recovery compared to
pre-pandemic values.
3But IIP numbers paint a more sober picture
IIP QUARTERLY GROWTH
That nominal growth will be significantly
higher than the real growth of GDP in
the March quarter is a given on account
of the sharp spike in wholesale price
inflation in the corresponding period.
However, what will be interesting to see
is the difference between nominal
growth component of agriculture and
non-agriculture sectors. This matters
because it will give us a broad idea about
the terms of trade or ratio of prices
received and paid between the farm and
non-farm sectors in the Indian economy.
If the Gross Value Added (GVA) numbers
confirm what the Wholesale Price Index
(WPI) numbers have been showing, then
one can expect headwinds to rural
demand going forward.
5GVA numbers will also tell us what is happening to
terms of trade between farm and non-farm sectors
WPI FOOD AND NON-FOOD COMPONENT
One of the major reasons why GDP numbers might not reflect the
strong recovery seen in formal sector high frequency indicators such as
PMI is a continuation of what has been described as the K-shaped
recovery in the economy where small firms and relatively poor
households continue to struggle. Economists have been arguing that
the upturn in commodity prices have had a bigger adverse effect on
small firms, thus worsening the unequal nature of the recovery in the
Indian economy.
“We find that large firms have outperformed small firms through the
pandemic, gaining market share and being more profitable. They are
also likely to weather the oil price shock better, having become more
energy efficient over time and having more bargaining and pricing
power than small firms,” Pranjul Bhandari, chief India economist at HSBC
said in a research note dated March 28. “Even before small firms had
fully recovered from lockdown-led-disruption, they were disproportion-
ately hit by higher commodity prices. This has even forced some small
manufacturers to shut shop in recent months,” Bhandari added in her
note.
Anecdotal evidence such as small spinning mills in Tamil Nadu shutting
production due to rising prices of raw materials (cotton) lends support
to the argument Bhandari has been making.
“South India Spinners Association (all members unanimously) has
decided to close 100% mills. The members will not buy cotton until the
situation is conductive Textile Mills cite a 53% rise in cotton prices and a
21% rise in yarn prices from Jan-May as reasons behind the closure.”
4The damage to small firms could be a reason behind
divergence between PMI and IIP
CHANGE IN MARKET SHARE OF FIRMS
Sep 2020 Mar 2021 Sep 2021 Dec 2021
Jun 2020
Mar 2020
Mar 2020
Jun 2012 Mar 2022
Firm size by paid up capital
4Q21 vs pre-pandemic avg 2017-2019
Mar 2022
Apr 2022
Source: CMIE
Source: CMIE
Source: CMIE
Source: CMIE
Source: HSBC Research
Dec 2020 Jun 2021
50m- 100m 150m- 250m
50m 100m- 150m 250m
-25
-20
-15
-10
-5
0
5
10
15
20
25
-6.64%
8.48%
5.4%
-23.82%
20.33%
2.53%
0.74%
0
10
20
30
40
50
60
Services PMI
Manufacturing PMI
51.8
49.3
4.7%
54.7
57.9
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
-6.3%
1.0%
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
-0.3%
0.0%
0.2%
-0.3%
0.5%
Primary articles food
WPI ex-primary articles food
-10
-5
0
5
10
15
20
7.4% 8.9%
15%
(Jun 2020)
-40.2%
(Jun 2021)
52.9%
4 things to watch out for
in today’s GDP numbers
By Roshan Kishore
The National Statistical Office (NSO) will release GDP numbers for the quarter ending March 31
on May 31. These statistics are being announced just a week before the meeting of the Monetary
Policy Committee (MPC) of RBI, which is scheduled to begin from June 6. Here are four
macroeconomic questions which the GDP statistics will give some clarity on.
NEW DELHI
TUESDAY
MAY 31, 2022
NumberTheory
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