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Photo: Bloomberg
Photo: Bloomberg

After May rebound, India’s economy has been stuck in limbo

12 of the 16 high-frequency indicators considered in Mint’s macro tracker were in the red in the latest update

The Indian economy appears to be stuck in a limbo, with no real improvement in high-frequency indicators for the second month in a row.

The economy took a big hit in April, when 14 of the 16 macro-economic indicators considered in Mint’s macro tracker were in red or below their five-year growth trend. This was the worst reading since the tracker was launched in October 2018 to provide a monthly report card on the state of the economy.

In May, the reading improved as several indicators saw a rebound, and the number of indicators in red fell to 12. Since then, there has not been much progress. For three successive months, 12 indicators have been in red, the tracker shows.

The tracker’s reading mirrors the data on public movement as captured by Google. After showing improvements in May and early June, public movement stagnated as coronavirus cases surged and lockdowns were re-imposed across states in late June and July. There has been some uptick in movements to workplaces and in park visits in August but the mobility levels remain significantly below their pre-pandemic levels.

All four indicators of production activity considered in Mint’s macro tracker, the composite Purchasing Managers’ Index (PMI), core infrastructure sector growth, bank non-food credit, and rail freight traffic, were in red for the fourth straight month, July’s numbers show. The composite PMI, which measures combined manufacturing and services, slipped to 37.2 in July, after rising from 14.8 in May to 37.8 in June. Rail freight traffic was 5% lower than its year-ago level in July. Core sector growth, published with a month’s lag, continued to contract in June (-15%). The last time the core sector had expanded was in February. Bank non-food credit grew only 6.7% in June, the lowest rate of growth since March.

The consumption scorecard was only slightly better than the production scorecard, with three of the four consumption indicators in red. Passenger vehicle sales picked up in July to the highest levels since March but remained substantially below year-ago levels (-17%). The decline in domestic air passenger growth (-82%) showed no material improvement. Broadband subscriber growth remains in positive territory but growth remains much below the five-year-average level. Tractor sales showed another month of sharp improvement (39%) in July, the one bright spot in an otherwise tepid consumer economy.

To add to the demand weakness, inflation has risen to almost 7%, raising the spectre of stagflation: rising inflation amid slowing growth. Economists remain divided over how long the current inflationary trend will last. The consensus was veering towards the view that the surge in inflation will be over soon because of weaknesses in domestic demand. However, the sombre warnings from the Reserve Bank of India’s (RBI’s) monetary policy committee members, who opted to pause rate cuts earlier this month, have raised fears that the inflationary bout may last longer than earlier thought.

The job outlook remains bleak, according to the RBI’s latest industrial outlook survey, covering 802 companies, and released earlier this month. As many as 29% of the net respondents said jobs declined in the June quarter. This is the bleakest hiring response recorded by the survey since 2005. As much as 8% of the net respondents said jobs would decline in the quarter ended in September as well.

All four indicators of the ease of living scorecard, CPI inflation (7%), core CPI inflation (6%), real rural wage growth (-2%), and job outlook (-29%), remained in red as of July.

India’s external sector remains a mixed bag. After reporting a trade surplus in June, India’s trade balance slipped back to deficit in July as gold imports shot up. While exports have seen a faster recovery compared to imports, they still remain below their year-ago levels. Exports in labour-intensive goods, in particular, remain depressed, adding to the stress in the job market.

Despite continuing weakness in the real economy, India’s financial metrics have improved in recent months. The gush of foreign inflows helped India’s currency appreciate against the dollar even as foreign exchange reserves improved further. The gains in India’s import cover and currency, along with an improvement in the stock market capitalization, lifted India’s rank among key emerging economies in July.

However, the rush of liquidity has also raised concerns that the exuberance displayed by investors may be overblown. The stock markets appear disconnected from reality and could be headed for a correction, warned RBI governor Shaktikanta Das in a recent interview.

Clearly, the Indian economy is not out of the woods yet. How long it will take to get out of the crisis depends a lot on what our policymakers do on both the health and the economic front.

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