The 33% fall in exports during March was not unexpected because the export orders sub-index of the ABN Amro Purchasing Managers’ Index (PMI) for manufacturing had fallen further in March. Although the overall PMI had gone up, the export orders sub-index went down to 43.6 from 44.5 in February and 45.1 in January. The survey clearly stated: “Foreign demand for Indian manufactures remained very subdued in March, resulting in a steep drop in new export orders. Moreover, the retrenchment in new work from abroad gained pace since February to its sharpest for three months.”
What was unexpected, though, amidst all the talk of green shoots, was the sharp contraction in non-oil imports, which shrank 18.9% in March compared with the year-ago period. That’s much worse than the 10.2% year-on-year (y-o-y) contraction in February and the 0.5% shrinkage in January, and is a clear indication of weak domestic demand.
Also See Shrinking Demand (Graphic)
Yet, a number of indicators, such as car sales, cement prices and despatches and steel prices, continue to suggest an improvement in the economy. The core infrastructure index is up 2.9% y-o-y in March, compared with 1.3% in February. And non-food credit growth during the last two-and-a-half months has been better than over the same period last year. Over the period 1 February to 10 April, the growth in non-food credit plus bank investments in corporate paper was Rs1.33 trillion. That’s 8.8% more than the growth during the same period last year, and is a clear indication that money is flowing to companies.
During the last fortnight for which data is available, the variation in non-food credit growth plus bank investment in corporate paper amounted to Rs576 crore between 27 March and 10 April—but during the same fortnight last year, non-food credit plus bank investments in corporate paper contracted by Rs26,808 crore. Yet HSBC economist Robert Prior-Wandesforde, in a recent note, says the manufacturing PMI, motor vehicle sales and cement despatches have been “less than reliable guides in the past”.
How do we reconcile the contradictory signals given out by the Indian economy at the moment? One reason for the recent bounce in many indicators is the impact of the government’s stimulus, which has, in large measure, been responsible for the rural resilience story. Morgan Stanley’s Chetan Ahya estimates that “industrial/infrastructure investment (including private corporate plus government capital expenditure) has declined to 23.6% of GDP (gross domestic product) in F2009 (fiscal) and should decline further to 20% in F2010 from the peak of 25% in F2008”. That should lower the demand for project and machinery imports, lowering non-oil imports. The point, though, is that if the primary reason for the improvement in the indicators is the stimulus, then it’s necessary for additional doses of that stimulus to be kept up.
That’s true not only of the Indian but also of the global economy. The latest manufacturing PMI data show that Chinese manufacturing (computed by the China Federation of Logistics and Purchasing) rose to 53.5 in April, compared with 52.4 in March. That’s two months in a row that Chinese manufacturing has expanded. PMIs for the UK and the US, too, have bounced off their lows, although they are still below 50, which means the sector is still contracting.
These improvements are the result of extraordinary stimulus measures administered by the respective governments. The bullish case rests on a continuation of that stimulus.
In the immediate future, though, given the improvement in PMI for most economies in April, the manufacturing PMI for India due on Monday can also be expected to show the same trend. If it does, that will indicate that the domestic economy is improving despite the lower import demand.
Graphics by Sandeep Bhatnagar / Mint
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