India’s economic report card is drenched in red ink

Launched in October 2018, Mint’s macro tracker provides a monthly 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.

A year ago, during the first nationwide lockdown, 13 of the 16 indicators had turned red, but this was followed by gradual improvement, especially in the consumer and producer economy segments, as lockdowns eased. By March 2021, only seven indicators were in red, or below their five-year average trend.

In April, nine indicators in the tracker turned red, while three were in line with past trends. The ferocity of the second wave, growing curbs to tackle it, and the sharp fall in the pace of vaccinations—all contributed to the slowdown in economic momentum last month.

Unlike last April, lockdowns this time have been region-specific and less stringent, ensuring that the economic hit has not been as catastrophic as it was last year. Nonetheless, the severity of the second wave and uncertainty around lockdowns has clouded the outlook on economic recovery.

The second wave has now peaked, but “new sources of uncertainty"—such as indefinite lockdown durations, weak consumer sentiment among affluent Indians, and infections in rural India—mean some of the economic costs could “outlive the duration of local lockdowns", said a 13 May note by Pranjul Bhandari, Aayushi Chaudhary, and Priya Mehrishi of HSBC Global Research. The uncertainties could temper the rebound in July-September compared with the sharp post-lockdown bounceback in 2020, the note said.

Consumption Hit

The consumer economy segment has been hit especially hard by the pandemic-induced lockdowns. Tractor sales—a key metric for rural demand that drove the post-lockdown recovery in 2020—slipped to its slowest growth in six months. Passenger vehicle dispatches declined at an annualized rate of 4% since the same month two years ago. Dispatches are typically a lead indicator and may not reflect sales in a given month. Vehicle registrations, which bear a closer link with retail sales, declined 17%—the much steeper contraction showing the impact of the lockdowns on the end consumer.

Air travel suffered despite being exempt from lockdowns, mostly due to widespread fear of the virus. The two-year decline was the steepest in six months.

All two-year change figures are based on the compounded annual growth rate, and use 2019 as the base year. The tracker now considers annualized growth over the past two years because the unusual contraction in most high-frequency indicators last year makes year-on-year growth comparisons less useful now.

The producer economy segment saw relatively better readings than the consumer segment. The composite Purchasing Managers’ Index (PMI) score was at 55.4, similar to March readings, and indicating a month-on-month expansion in economic activity. Robust export orders helped push up manufacturing activity and the overall index this time. Rail freight traffic grew at an annualized pace of 5% compared to pre-pandemic levels, suggesting that supply-side disruptions have been less severe this time.

Other producer economy indicators present a less rosy picture. The eight core infrastructure sectors saw their first dip in output this year while non-food bank credit grew at its slowest in years.

Stress Points

Producers catering to global markets fared better than others, the data show. With the world’s two largest economies, China and the US, recovering rapidly, global trade has seen a sharp rebound over the past couple of months. India’s exports grew at a two-year rate of 8%, the quickest in almost two years. The push came from labour-intensive sectors, such as gems and jewellery, and leather products, which reversed their losses to grow for the first time since October 2019.

Other labour market indicators—the rural wage rate and the labour force participation rate—suggest continuing stress in the labour market. Unemployment, as measured by the Centre for Monitoring Indian Economy, was on the rise in April, and if the trend continues, it could pose a question mark on consumer demand in the coming months.

Inflation could pose another source of worry, as it would erode purchasing power of consumers while making it difficult for the Reserve Bank of India (RBI) to maintain an accommodative stance for long. Retail inflation, calculated over a two-year period, remained high in April at 5.7%. A larger worry is the rise in core inflation, which excludes volatile items such as food and fuel. Some economists fear that rising wholesale prices could also soon spill over to retail prices, hitting consumers hard.

Core inflation was likely to stay elevated in 2021, while food inflation would be “largely well behaved" despite rising global prices, thanks to a favourable monsoon and easing of supply-side snags, said a 13 May note to clients from ICICI Securities Primary Dealership.

Most analysts have downgraded their estimates for India’s economic growth, citing the impact of the pandemic-induced lockdowns and the slow pace of vaccinations. At a time when several major economies are recovering fast, India’s economic report card still looks bleak.