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Why did domestic revival stay in the slow lane in November?

The tracker’s performance in November was just one notch better than September and October, when 10 indicators had been in the red, the worst reading since May 2021.Premium
The tracker’s performance in November was just one notch better than September and October, when 10 indicators had been in the red, the worst reading since May 2021.

Nine of the 16 high-frequency indicators considered in Mint’s monthly macro tracker ended up in the red, or below their five-year average trend, last month. This was just one notch better than September and October

India's economic revival appears to have stayed in the slow lane in November, still plagued by some of the factors that had kept the picture dull in October. Global supply disruptions made their presence felt again as nine of the 16 high-frequency indicators considered in Mint’s monthly macro tracker ended up in the red, or below their five-year average trend. With the Omicron variant of covid-19 now weighing on growth prospects, the recovery trajectory looks iffy yet again as the year ends.

The tracker’s performance in November was just one notch better than September and October, when 10 indicators had been in the red, the worst reading since May 2021. The downturn was in large part due to poor auto sales amid a global shortage of semiconductor chips. In a 1 December report, economists at foreign brokerage Nomura said some of these factors were easing but “only at a margin." Further, there were risks of a demand slowdown in mass consumption segments such as entry-level cars and two-wheelers, the report said.

On some parameters, the uptick has stayed on course in December so far, with Nomura’s business resumption index rising to new highs each week. This has been mostly driven by increasing mobility and a resurgence in a fast-recovering services sector. But the rising Omicron cases and restrictions imposed over the past week in several cities could disrupt contact-intensive sectors such as travel and hospitality again. A clearer picture of recovery in December will emerge next month, when more data is available.

Launched in October 2018, Mint’s macro tracker provides a comprehensive state-of-the-economy report based on trends in 16 high-frequency indicators across four segments: consumer economy, producer economy, external sector, and ease of living. The tracker fared the worst during the lockdown months of April 2020 (with 13 indicators in red) and May 2021 (12 in red).

Mixed bag

After two months of staying entirely in the red, the consumer economy segment of the tracker improved slightly in November as tractor sales rose 8.2% (annualized) over the same period two years ago. But despite being in line with the five-year trend, the sales figures were lower than the preceding month. For the third straight month, the automobile sector performed poorly, resulting in a 19.1% annualized drop in passenger car sales compared with the same month of 2019.

Domestic air traffic gained traction, with 10.5 million passengers flying during the month—the most since the pandemic began. The deficit with pre-pandemic levels also stood at its narrowest since March 2020. But the Omicron spread is likely to have clipped travellers’ wings in December, shows early data available from analysts.

The producer economy segment did better, with three of four indicators in the green. This was led by a near-decade high figure for the composite purchasing managers’ index, a key measure of business sentiment. The robust numbers reflected strong festive demand as well as a fast expansion in activity. Growth in rail freight, the biggest contributor to railway revenue, slowed in November but the pace was far above its five-year trend. Non-food credit extended by banks was the only indicator in the red, but data on this is available with a month’s lag.

Inflation risks

The external sector is struggling with a widening trade deficit, which rose to a new high of $22.9 billion, surpassing September’s peak. This was driven by weak exports as well as continued impact of high energy prices, and this does not bode well for India’s current account deficit if it continues, analysts said.

Exports in labour-intensive sectors such as tobacco, gems and jewellery, and leather reported their first decline in five months even though they stayed above the five-year trend. The domestic currency's performance versus the dollar improved, and was better than key emerging market peers.

For the eighth straight month, the ease of living segment was completely red, the longest such streak since the tracker has been capturing high-frequency indicators. This shows that even though businesses are slowly getting back on their feet, the pandemic has dealt a heavy and sustained blow to household finances.

Excise duty cuts on fuel failed to keep year-on-year retail inflation from hitting a three-month high, as food prices inched up. But when compared to two years ago, inflation eased modestly given the base effect. As this effect wanes December onwards, inflation is only likely to rise further. 

Core inflation, which excludes food and fuel, increased marginally, and was described as a policy challenge by the monetary policymakers at the Reserve Bank of India earlier this month. Retail prices could indeed become a headache for the central bank as risks to growth refuse to subside.

Meanwhile, the labour force participation rate, as measured in a survey by the Centre for Monitoring Indian Economy, declined marginally to 40.2% but remained below the five-year average.

Although the covid-19 vaccination campaign is making steady progress, the Omicron’s spread adds fresh uncertainty to the economic recovery. In the absence of prompt fiscal support, recovery continues to rely heavily on quick monetary policy reaction. All eyes will be on the discourse surrounding the next year’s Budget in the coming weeks.

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