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The engines of recovery are chugging along smoothly

Barring some red flags, the recovery engine is now safely chugging ahead, the latest update to Mint’s monthly macro tracker suggests.Premium
Barring some red flags, the recovery engine is now safely chugging ahead, the latest update to Mint’s monthly macro tracker suggests.

  • For the first time in two and a half years, eight of the 16 indicators considered in Mint’s macro tracker were in the green, or above their five-year average trend, in August. The imminent demand boost in the festival season could spell further uptick—but some risk, too

Healthy progress across key segments of the economy took India within striking distance of pre-pandemic activity levels in August. Rising covid-19 vaccine coverage cheered up the services sector ahead of the festival season, lifting most high-frequency indicators from the lows of the second wave. Barring some red flags, the recovery engine is now safely chugging ahead, the latest update to Mint’s monthly macro tracker suggests.

Eight of the 16 high-frequency indicators considered in the tracker were in the green, or above their five-year average trend, in August. This is the best reading not only since the pandemic began, but in nearly two and a half years.

But there’s still distance to be covered. In August, eight indicators were also in the red, or below their five-year average trend. Four of these were in the ease of living segment, which affects the common Indian directly—inflation, despite cooling, is well past the target rate, real wages are declining, and the employment picture is worrisome.

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 just three indicators in the green during the lockdown month of April 2020 and four in May 2021.

The quick recovery stems from a better adaptability to the pandemic, a high prevalence of antibodies against the SARS-nCoV-2 virus, and a rapid uptick in the vaccine drive. Easy financial conditions should also support continued revival in domestic demand, said analysts at Nomura in a research note dated 1 September.

Recovery has continued in September so far, albeit with reduced intensity. Nomura’s business resumption index, a clutch of indicators such as mobility, electricity demand, and goods and services tax e-waybills, dipped slightly, though still above pre-covid levels. A clearer picture will emerge only next month when more data for September is available.

Green Shoots

The consumer economy segment stayed afloat, marking a second straight month of having two indicators in green. Tractor sales, a barometer of rural demand, led the way, rising by an annualized 20% over the two-year-ago period for the third straight month and setting the stage for an upbeat festival season.

The tracker considers annualized growth over the past two years to compare current levels of activity with the pre-pandemic period, to avoid the base effect distortions in year-on-year comparisons.

Passenger vehicle dispatches to showrooms were in green for only the third time during the pandemic. However, vehicle registrations, which bear a closer link with retail sales, are yet to recover, declining 7.6%.

Air travel is picking up. Domestic airlines ferried 6.7 million passengers in August, a 37% monthly jump and the highest since March. The deficit has narrowed to an annualized 25% over the two-years-ago period.

The purchasing managers’ index (PMI), a widely-tracked gauge of business activity, showed its first expansion since April. The services PMI was an 18-month high, marking a crucial milestone in revival of pandemic-hit businesses. Business confidence staged a rebound with increased consumer footfalls. However, export orders were subdued and input costs remained a pain point for businesses.

Upcoming risks

The external sector segment was all green for the first time in five years. Trade momentum stayed above pre-covid levels, though the growth rate moderated slightly as oil prices dropped below $70/barrel in August. Supply bottlenecks and a tapering global demand amid Delta outbreaks made their effect felt, with exports declining 6% since July.

Exports in labour-intensive sectors grew for a second straight month—though slower than in July, it shows the labour market stress may be improving. The rupee had a stable month due to foreign inflows, but uncertainty over the US Federal Reserve’s policy moves could keep the forex markets tense for some time now.

Retail inflation, an indicator in the ease of living segment, cooled significantly but still came in at 6% when compared over a two-year period. The broad-based drop allayed fears of upward price pressures for now. But as the base effect begins to wane, this could see a rebound. Fuel prices are still on the rise. The Reserve Bank of India’s (RBI) rate-setting committee is likely to keep its accommodative stance until demand strengthens enough to replace supply issues as the key inflation driver, said Aditi Nayar, chief economist at ICRA. The panel meets next week.

Meanwhile, rural wages declined 1.1% in real terms over the two-year-ago period, raising worries that incomes and consumption could stay under stress for some time. The labour force participation rate, as measured in a survey by the Centre for Monitoring Indian Economy, rose marginally to 40.5%.

The RBI meeting next week will throw further light on policymakers’ views on growth recovery. August was a month of hope, but as festivals take over, the recovery could move either way with increased mobility. Averting a third wave will be crucial even as a demand boost beckons.

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