Clearing the fog on economic recovery

There seems to be some urgency to declare that “all is well” with the Indian economy. Truth be told, things are definitely much better than they were between April and June—during and immediately after the lockdown which was imposed to prevent the spread of covid-19.

But it is important to point out that when we talk about economic growth in the Indian context, we always do so on a year-on-year basis. Hence, while the state of the economy has definitely improved in comparison to the period between April to June, it is important to understand where we stand in comparison to how it was a year ago.

In order to get a more realistic picture of the state of the economy, we look at 21 economic parameters for September/October 2020, depending on the latest month for which data is available, and calculate how they fare against September/October 2019. In some instances, where monthly data is not available, quarterly data is used. Also, in some cases—the unemployment rate and the labour participation rate—direct rates have been used.

So, what are the broad takeaways? In 17 out of 21 major economic indicators, the Indian economy is still considerably worse off than a year ago. It is important to note that by August 2019 an economic slowdown had set in and so the comparisons are against an already weak base.

Some parameters like revenue-earning rail freight have indeed recorded a marginal improvement. Car sales have also done relatively well. However, parameters like new investment projects announced and the amount of work demanded under the Mahatma Gandhi Rural Employment Guarantee Scheme (MGNREGS) tell us that the economy is on a weaker wicket despite widespread attempts to put a positive spin by showcasing month-on-month sequential improvement.

Further, rural India may not be on as strong a wicket as is commonly believed and the government isn’t in a position to do much given that its tax revenues have collapsed. Another key point to keep in mind is that the growth rates of 17 of these 21 parameters are also worse off when a comparison is made between September 2020 and February 2020, the pre-covid level. This again tells us that despite our inherent desire to feel positive about things, that time hasn’t arrived as yet. Let’s look at these economic parameters in detail.

Domestic car sales: In the case of automobile sales, Mint has considered the number of new registrations at the Regional Transport Offices (RTOs) throughout the country and not the sales data provided by the industry body. The latter reports the number of units dispatched from the factories to retailers or dealers across the country and does not represent sales to end consumers.

The number of cars registered in October 2020 stood at 249,860 units and was 8.8% lower than in October 2019. This difference primarily lies in the fact that Diwali last year was in October and this year it falls in mid-November. The registrations between September and October went up by 27.7%.

One reason for slightly robust car sales lies in the fact that a very small section of people who had not been buying cars despite the fact they could afford to is now buying them in order to avoid taking public transport. This can be seen in how value for money cars have seen sales.

Two-wheeler sales: Two-wheeler registrations in October 2020 fell by 26.2% y-o-y to 1.04 million. Sales are even lower than they were two years ago. This tells us that the aspirational Indian middle class is in trouble. In fact, it has been in trouble for close to two years now.

Also, there is a huge disconnect between registrations data at RTOs and the sales data that is provided by the automobile industry. As per the industry, two-wheeler sales in October stood at 2.05 million units. Some of this gap can be explained by the fact that states like Andhra Pradesh, Telangana and Madhya Pradesh aren’t yet on the government’s Vahan database.

But more than that, the auto companies are in the process of piling up huge inventory with the dealers in the hope of more unit sales during the festival season.

Domestic tractor sales: In October 2020, 55,146 tractors were registered in RTOs throughout the country. This was 55.5% more than in October 2019. This parameter has clearly seen a dramatic improvement thanks to good growth in the agriculture sector, which has benefitted the rural rich.

Bank retail loans growth: People tend to borrow when they are confident about their economic future and, hence, their ability to pay EMIs. This confidence is clearly missing currently. The outstanding retail loans of banks grew by 9.2% in September. This is the slowest in 10 years. The last time something like this happened was in August 2010, when retail loan growth was 8.8%. Home loans, which form more than half of the outstanding retail loans, grew by just 8.5%, the slowest since May 2012. Other than the lack of confidence among people, banks are also being doubly careful while lending.

Volume growth of FMCG: The volume growth basically measures an increase in sales or the number of units. Here, we use the volume growth of Hindustan Unilever Ltd. For the period between July to September 2020, it stood at 1%, against 5% in the same period last year. What this reveals is the company is finding it difficult to sell more units of its products. The good news is that volume growth during the period between January and March 2020 was also only 1%.

Non-oil non-gold non-silver imports: This is an excellent parameter for looking at consumer demand. It contracted by 8.3% in October. This is an indication of lower consumer demand than last year. The good news is that the contraction has been coming down each month.

Consumption of petroleum products: As the economy has opened up and the traffic volume in cities has largely gone back to what it used to be, the overall consumption of petroleum products has improved. But it was still down by 4.5% in September. This was primarily on account of the aviation sector, which is not operating on full throttle and, hence, lower demand for turbine fuel.

Gross electricity generation: As industries have opened up, electricity consumption has improved. Also, with people spending more time at home, their electricity consumption has gone up. This has sort of made up for the electricity consumption in offices, which are still largely shut or are not operating at full capacity. Electricity production in September improved by 4.4%.

Work demanded under MGNREGS: Many individuals left big cities and went back to their villages in the aftermath of the covid outbreak. Hence, not surprisingly, the work demanded under the work-guarantee scheme has simply exploded. In September, the work demanded went up by 88.5% y-o-y. The fact that people are ready to take on low-paid manual work (which pays ₹202 per day on average) tells us there is a dearth of jobs. Hence, there is another more sombre rural story beyond the fact that tractors are selling well.

Labour participation rate: This is the ratio of the labour force to the above 15 population. Over the past few years, this has been falling primarily because those who cannot find jobs are opting out of the labour market. In January 2016, it stood at 47.7%. It fell to a low of 35.6% in April 2020 and has since improved to 40.7% in October 2020. The fact that jobs have been generated under the employment guarantee scheme has helped. Nevertheless, the rate was at 42.9% last October.

Unemployment rate: The unemployment rate fell to 7% in October 2020 against 8.1% last year. This has primarily been on account of more work being made available under the employment guarantee scheme and a fall in the labour participation rate, leading to a shrinkage in the number of people looking for jobs.

Commercial vehicles sales: Faster sales indicate robust activity on the infrastructure and industrial front. As we shall see, that is not happening. Commercial vehicle sales fell by 30.3% in October 2020; this after they had already fallen by 23.5% last September. Even the low base didn’t come to the rescue.

Bank lending to industry: For more than half a decade, banks have been uncomfortable when it comes to lending to the industry and that trend continues. Bank lending growth was flat in September 2020, after having grown by 2.70% in September 2019. This is a proxy for the lack of corporate investments.

Revenue earning rail freight: This is one parameter that has recovered big time. One reason for this lies in the fact that the Indian Railways is moving a massive amount of food grains across the country in order to ensure the delivery of the free grain. In October 2020, the freight moved by the railways jumped by 15.4% in comparison to last September. The fact that commodities like coal, cement, iron ore, etc. are also being moved around across the country suggests that more and more economic activity is being planned.

Consumption of finished steel: This indicator contracted by 2% in October in comparison to a 5.4% growth last year. While this indicates an overall investment slowdown, the good news is that the overall steel consumption has been improving from the lows of April.

New investment projects: There has been a huge crash here, with corporates holding on to their resources. Completion of already announced projects has also tanked.

Cement production: Cement production was down 3.5% in September 2020. This. after being down by 85.2% in April and 21.4% in May. In that sense, things have improved. Industrialist Kumar Mangalam Birla provided a very interesting reason for this recently while speaking at the Business Insider Global Trends festival. According to him, the demand has gone up because people who have gone back to their villages and home towns are adding an extra room to their homes in order to prepare for the possibility of staying back for a longer period of time. Having said that, cement production growth is lower than in early 2020.

Gross tax revenue: Except for excise duty, collections of all other central government taxes have fallen.

Goods exports: In October, goods exports fell by 5.4%, against a contraction of 1.7% last year. This contraction comes after a growth of 5.9% in September. The improvement had happened primarily because the countries India exports to had recovered faster from covid than India had. But now, with the pandemic picking up pace again in the Western world, demand is down again.

Inflation: Thanks to persisting high food inflation, inflation in September 2020 shot up to 7.3% against 4% last year.

To conclude, things have definitely improved from the lows of April to June. Nevertheless, when it comes to growth, we are much behind where we were last year or even before when covid broke out. And that is the important bit no one seems to be talking about. It is important simply because growth is measured year-on-year and not between random time periods. The real state of the economy is that it still needs support that goes beyond constant predictions of ephemeral green shoots.

Vivek Kaul is the author of Bad Money