India’s economic report card showed some signs of improvement with five of the sixteen high-frequency indicators in green (above the five-year average trend) as of February, the latest edition of the Mint Macro Tracker shows. Of the remaining 16 indicators, eight were in red while three maintained trend.

February’s reading marked a modest improvement over January, when only three indicators were in green, while nine were in red. The Mint Macro Tracker, launched in October 2018, provides a monthly state-of-the-economy report based on trends in sixteen indicators across four segments: consumer economy, producer economy, external sector, and ease of living.

The improvement in February came on the back of gains in the producer economy segment and the trade sector. But these gains are likely to be short-lived. The impact of the Covid-19 pandemic will show up only in the March data, and it is unlikely to be a pretty picture.

The biggest improvement in the latest scorecard was on account of India’s trade deficit (as per cent of total trade) falling to a 29-month low in February. India’s import cover too improved to 12.2 in February from 11.5 months in January. Both these indicators of India’s external sector performance flashed green. The other two indicators—the dollar rupee exchange rate and labour-intensive export growth—were in amber (maintaining trend) and red, respectively. But the sharp fall in the value of the rupee against the dollar in March so far shows how the external sector scorecard could now be turning red. The rupee has depreciated about 3.5% in March so far compared to last month.

Anecdotal reports suggest exporters have been hit hard due to the impact of the Covid-19 pandemic on global trade and demand.The supply chain disruptions are likely to spillover to manufacturing activity in India, which could take a hit as the imports of intermediate goods are interrupted.

Nascent improvements in the producer economy segment have already started to peter out. All four indicators of the sector’s performance—PMI composite, core sector growth, bank non-food credit and rail freight traffic growth—had witnessed improvements last month, numbers as of February showed. The improvements in the PMI composite index (57.6) and rail freight traffic growth (6.5%) were particularly sharp in February. However, the improvement in PMI composite was largely on account of the services industry. The manufacturing PMI index had fallen to 54.4 in February from an eight year high of 55.3 in January. The decline would only be steeper in the following months with automakers shutting down plants and suspending production in March, and other sectors likely to follow suit.

The factory closures come at a time when demand in the economy was already weak. The consumer sector economy barely showed any improvement even in February with three of the four indicators—passenger vehicle sales, broadband subscriber base growth and domestic air passenger growth—flashing red for the eleventh successive month. Only tractor sales growth (4.8%) showed some improvement in February. With many jobs being hit because of the country-wide lockdown, demand will be impacted even more severely in the weeks ahead.

With global markets in a tailspin and the International Monetary Fund warning of a global recession, all major economies, including India will take a hit, and the growth in India’s gross domestic product (GDP) could come down sharply in the next couple of quarters.

The only silver lining amid the pandemic lies in the fall in crude oil prices, which has improved the trade balance and is likely to bring down inflation. Of the four indicators of the ease of living scorecard--- headline and core inflation, real rural wages and job outlook--- three were in the red, as of February. Only core inflation was in green. The fall in headline inflation could be a welcome relief in the coming months but the distress in the rural sector and impact on jobs could offset any such gains and dampen the purchasing power of most Indians.

The decline in inflation would however give room to the Reserve Bank of India (RBI) to cut policy rates. While RBI has announced some measures to boost liquidity in the foreign exchange and domestic markets, it has stopped short of cutting interest rates so far unlike global peers, which have front-loaded rate cuts.

Lower crude oil prices could also result in a revenue gain for the central government of about 0.4% of GDP. But this is unlikely to provide much space for another round of fiscal stimulus, said Anubhuti Sahay of Standard Chartered in a report dated March 12. Besides, the government may want to allocate extra funds to healthcare.

The spread of Covid-19, in India and globally, is likely to be the biggest determinant of how the macro-tracker is going to look like in the coming months. All arms of public policy --- fiscal and monetary --- will be required to mitigate the economic impact of the health shock.

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