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September marks a deterioration in economic recovery

The coming months may see a consumption boost due to festivals and arrears payment of dearness allowances for government workers, said analysts at Nomura in a report on 8 October (REUTERS)Premium
The coming months may see a consumption boost due to festivals and arrears payment of dearness allowances for government workers, said analysts at Nomura in a report on 8 October (REUTERS)

Ten of the 16 high-frequency indicators considered in Mint’s monthly macro tracker fell below their five-year average trend in the worst showing since May. However, GDP forecasts remain intact, suggesting that the September dip was an aberration

India’s economy appears to have faced hiccups in its recovery trajectory in September as global supply constraints and an upbeat domestic mood resulted in divergent trends. Ten of the 16 high-frequency indicators considered in Mint’s monthly macro tracker fell into the red, or below their five-year average trend, last month. This was the worst showing on the tracker since May.

The deterioration was driven by the consumption segment, even as the ease of living segment remained worrisome. In August, the tracker had reported its best performance in five months, with just seven indicators in red.

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. At its worst, the tracker had 12 indicators in the red during the lockdown months of April 2020 and May 2021.

In a report on 21 October, credit rating agency ICRA noted that India's recovery had continued into the September quarter as the second covid-19 wave subsided, but turned “multi-speed". A greater number of sectors improved their performance but with considerable variation in the pace, the agency said.

However, both the Reserve Bank of India (RBI) and the International Monetary Fund retained the country’s growth outlook for 2021-22 this month, suggesting that the poor performance in September may just be an aberration and the economy could continue to recover.

The coming months may see a consumption boost due to festivals and arrears payment of dearness allowances for government workers, said analysts at Nomura in a report on 8 October. “Rainfall picked up in September, resulting in normal monsoons this year, which should be a positive for the rural economy," the report said. This is likely to show in future editions of the tracker as more high-frequency data for October become available.

Supply crisis

All four consumer economy indicators fell into the red for the first time since June 2020. Passenger vehicle and tractor sales slowed to their worst year-on-year pace in four months as a global semiconductor shortage forced automakers to curtail production despite the prospects of festival demand.

Data from the Federation of Automobile Dealers Association (FADA) shows vehicle registrations fell 5.3% year-on-year but the decline was a much sharper 7% (annualized) compared to September 2019. Until August, pent-up demand, cheaper credit, and massive fiscal support for the farm sector had made car and tractor sales key drivers of economic recovery, especially after the second wave.

The tracker considers growth over the past two years—on an annualized basis—to compare current levels of activity with the pre-pandemic period, as year-on-year comparisons can be misleading due to base effects.

Domestic air travel continued its gradual uptick, rising 5.5% since August, but stayed significantly behind pre-pandemic levels. Revenge travel and increased public mobility could aid recovery in coming months.

The producer economy segment fared better, with broad-based improvement in the purchasing managers’ indices for both manufacturing and services sectors. Demand-led growth with fading pandemic risks improved business confidence and market conditions despite rising input costs.

Non-food credit extended by banks improved marginally in August, but has remained in the red for a year. Data for this indicator is available with a month’s lag.

Stress points

As in recent months, the external sector continued to be the key saving grace in the tracker, albeit with some deterioration. A sharp 84% year-on-year rise in imports widened the trade deficit to an all-time high, throwing trade balance into red.

A Nomura report suggested that the high imports were driven by anomalous volumes, but the trend could still continue, driven by elevated oil and commodity prices among other factors.

Better performance in engineering goods and petroleum products supported exports, but labour-intensive sectors saw a slowdown due to weak global demand.

All four indicators in the ease of living segment were in red. Retail inflation cooled significantly but primarily due to a base effect. Compared over a two-year period, inflation remained just short of the 6% upper limit. Energy and oil prices are already having ripple effects on production and prices of other commodities, and inflationary pressures will become more apparent as the higher base fades out.

Such persistent price pressures, combined with risks of a GDP hit from global supply disruptions, might put the RBI in a hard spot again as it has already shown signs of moving to a path of monetary policy normalization.

The labour force participation rate, as measured by the Centre for Monitoring Indian Economy, is inching towards pre-pandemic levels but remains in the red. The decline in real rural wages that had been persistent for a year showed signs of improving. The ease of living segment—spending power and real wages—must improve for the economy to sustain its recovery.

The push to the economy has so far come from the vaccination drive, which has done well in fighting off the supply crunch seen in earlier months. However, India won’t be immune to the sagging trajectory of global recovery, as the tracker showed in September. The ability to avert a third wave during upcoming festivals will be key to bring back the path of sustained recovery.

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