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Rising energy costs, stalling auto sales hurt recovery in October

India’s economic recovery struck fresh roadblocks in October as rising energy prices and domestic coal shortages weighed on key high-frequency indicators. Photo: Bloomberg Premium
India’s economic recovery struck fresh roadblocks in October as rising energy prices and domestic coal shortages weighed on key high-frequency indicators. Photo: Bloomberg 

As many as 11 of 16 high-frequency indicators considered in Mint’s macro tracker fell into the red, or below their five-year average trend, in October. This is the reddest the monthly report card has been since June

India’s economic recovery struck fresh roadblocks in October as rising energy prices and domestic coal shortages weighed on key high-frequency indicators despite the festive push. As many as 11 of 16 such indicators considered in Mint’s macro tracker fell into the red, or below their five-year average trend, last month. This is the reddest the monthly report card has been since June.

In September, 10 indicators had been in the red, a sharp deterioration from the solidifying signs of recovery in August. That was primarily due to the way global semiconductor shortages were choking the auto sector. While those issues remain, new global factors have emerged, hurting India’s trade balance and the rupee’s exchange rate. Other pain points such as weak consumption growth and inflationary pressures stayed as well.

However, some indicators also showed their best growth in years. Three of the four indicators that were in green, or above their five-year trend, surpassed pre-pandemic highs. The purchasing managers’ index (PMI) in particular, a measure of business activity, reached a decade-high.

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.

Some indicators have been on the uptick in November so far. Since mid-October, a business resumption index run by Nomura, which incorporates data on mobility, electricity demand, and labour force, has been hitting fresh highs every week. However, in a 7 November report, the brokerage also pointed to headwinds for medium-term growth, such as the impact of coal shortages on industrial activity in the next few months, and inflationary pressures and trade shocks. A full range of data for November will be available only next month.

Mixed bag

All four consumer economy indicators remained in the red, albeit with marginally reduced severity.

The automobile sector continued to be weighed down by the already full-blown global crisis of semiconductor shortages, resulting in a 21% (annualized) drop in passenger car wholesales when compared with the same period two years ago. Vehicle registrations, which are more closely related to retail sales, fell 5.3% year-on-year (y-o-y), marking the worst holiday season performance in a decade, said the Federation of Automobile Dealers Associations (FADA).

However, domestic air travel continued its ascent and reached the closest it has been to the two-years-ago level since the pandemic began. Domestic airlines carried nearly 9 million passengers in October, just 14% (annualized) below the October 2019 figure.

Tractor sales growth was below the five-year average, but in absolute terms, the industry clocked its highest-ever domestic sales in October owing to resilient rural demand fuelled by anticipation of a big harvest, strong sowing, and easy credit.

The producer economy outperformed the consumer segment, thanks to solid growth in the PMI owing to a broad-based expansion across the manufacturing and service sectors. IHS Markit, the agency that releases the data, noted the strongest monthly expansion in new business in over a decade, with no detrimental impact of price hikes on demand.

Rail freight, the biggest contributor to railway revenue, also recorded its fastest growth since data has been collected for the tracker and was far above its five-year average.

Challenges remain

Meanwhile, the external sector’s performance weakened with two indicators slipping into red, compared to only one in September. The biggest blame lay on high crude prices and a depreciating rupee: the currency had its worst showing against the dollar since April, falling 1.8% in October.

Trade deficit came off record highs but remained elevated, driven primarily by an increase in petroleum imports. Core imports, which exclude petroleum, are likely to stay high in the near term, driven by import bills for coal amidst domestic shortage and the possibility of easing supply stress in sectors such as automobiles, said ICICI Securities in a report dated 3 November.

However, export growth in labour-intensive sectors such as tobacco, gems and jewellery, and jute manufacturing among others had its best month in nearly two years, expanding at an annualized 6.4% when compared with two years ago.

The ease of living segment is not showing signs of improvement. Retail inflation saw an uptick even as the 4.5% headline figure appeared to stay within the Reserve Bank of India’s (RBI’s) 2-6% range. However, this masks the base effect: a two-year comparison shows inflation was on the margins of that tolerance range (6%). Concerns about high global commodity prices could keep prices on the upside despite the excise duty cut on fuel.

Economists at Nomura expect the RBI to keep its accommodative policy in favour of growth at least for this fiscal. However, rising inflationary pressures could push that policy normalization forward.

Meanwhile, the labour force stress is not easing consistently. A survey by the Centre for Monitoring Indian Economy put the labour force participation rate at 40.4% in October, down from 40.7%. Figures on wage growth are not yet available for October.

With the sustained decline in covid-19 cases and improving vaccinations, India appears to have avoided a third wave of the pandemic. In the near term, however, global supply-side bottlenecks and high energy costs will be critical in keeping the country on its recovery track, as the October data shows.

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