After a quick rebound from covid, recovery slowed in July
4 min read 25 Aug 2021, 11:57 AM ISTSix of the 16 indicators considered in Mint’s macro tracker were in the green, or above their five-year average trend, in July. While this matched pre-second wave levels, the tracker still had nine indicators in the red, showing the economy isn’t out of the woods yet
PremiumThe economic shock of the second covid-19 wave is fading away, well in line with forecasts that it would be short-lived. India’s recovery continued in July, led by improving consumption and trade figures. But progress was marginal, slowing down from the swift post-lockdown turnaround of June, shows the latest update to Mint’s monthly macro tracker.
The tracker turned a shade greener—as green as it was before the second wave—but red flags remained. As in June, nine of the 16 high-frequency indicators considered in the tracker were in the red, or below their five-year trend, with household-level stress still acute. Six were in the green, or above the five-year trend, while one was in line with it.
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 struck its lowest levels during the lockdowns of April 2020 (13 indicators in red) and May 2021 (12 in red).
The July readings show that the economy, despite rapid gains, still has some ground to cover. Business activity, as measured by the composite purchasing managers’ index (PMI), remained a sore point in July despite rising mobility and market confidence. Retail inflation cooled but was on the higher side, even as data on employment and wages were subdued.
High-frequency data for August available so far suggest a pick-up in momentum since July. Nomura’s business resumption index, which uses data on mobility, electricity demand and workforce, now exceeds pre-pandemic levels. But a clearer picture will emerge only next month when data for a broader set of indicators will be available.
Recovery in coming months will be driven by the festival season demand, arrears payments to government staff, the pace of vaccinations, and easy financial conditions, economists at Nomura said in a 23 August note to clients.
Green Shoots
The consumer economy segment staged a remarkable recovery: for the first time since March 2019, two of its four indicators were in green. This was led by tractor sales, a barometer of rural demand that has been the quickest to rebound from lockdowns since last year.
Passenger vehicle dispatches to showrooms posted their first growth in nearly three years, rising an annualized 5% over the two-year-ago period. But vehicle registrations, which bear a closer link with retail sales, were still behind pre-second wave levels, and declined 7%.
The tracker now considers annualized growth over the past two years to compare current levels of activity with the pre-pandemic period, and to avoid the base effect distortions in year-on-year comparisons.
Even as the pandemic subsided, Indians stayed wary of air travel. Domestic airlines carried 5 million passengers in July, a 61% sequential jump but still lower than April. Compared with the same month two years ago, the gap was an annualized 35% in July.
The third straight contraction in the composite PMI was led by the contact-intensive services sector, which is struggling to pick itself up amid elevated input costs and muted demand. A decline in new orders and poor employment in the sector also kept businesses pessimistic. The manufacturing sector, however, came out of a brief contraction to post a healthy growth figure in July.
Stress Points
The external sector got a boost from improving trade momentum, with three indicators in the segment above their five-year trend. Aided by recovering global growth as well as a weak month for the rupee, India’s exports climbed to a record $35.4 billion in July—a two-year growth of 16%. Both exports and imports were lifted somewhat by rising crude oil prices. Exports in labour-intensive sectors also posted growth—only the second time since October 2019, indicating that some parts of the labour market could be healing. The rupee’s decline (1.3%) was in line with trends from other emerging markets (EMs), which faced uncertainty over the US Federal Reserve’s policy moves.
The ease of living segment stands all red for the fourth straight month. Annual retail inflation eased but was above the 6% mark when compared over a two-year period. Food prices came down due to supply-side government measures, but fuel prices were a pain point. Core inflation, which excludes food and fuel, saw only a modest dip.
Not much relief is likely for now as input prices stay high and demand recovers. In its August meeting, the Reserve Bank of India’s rate-setting committee raised its near-term inflation forecasts—an indication that the problem will persist and policymakers will tolerate it to support economic growth. However, dissent is creeping up in the committee, as one member warned of inflation persisting if the easy money policy stayed for long.
Meanwhile, rural wages declined 1.2% in real terms over the two-year-ago period, which could keep incomes and consumption under stress. The labour force participation rate, as measured in a survey by the Centre for Monitoring Indian Economy, stayed at a modest 40%.
The vaccination drive, and India’s ability to contain a third wave will determine the sustainability of the ongoing recovery. But improvement in the vaccination pace has been very slow, and India is a long way from its target of vaccinating all adults by December.
