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Photo: Mint
Photo: Mint

Economy shows signs of bottoming out

The eight infrastructure sectors contracted sharply for the third month in a row in May though lower than the record dip in April, with only fertilizer production (7.5%) registering positive growth

India’s eight infrastructure sectors showed signs of bottoming out in May while the country’s fiscal showed increasing signs of stress even as the current account turned positive in the March quarter on the back of lower imports—all three impacted by the unfolding coronavirus pandemic in Asia’s third largest economy.

The eight infrastructure sectors contracted sharply for the third month in a row in May though lower than the record dip in April, with only fertilizer production (7.5%) registering positive growth. In May, the core sector data released by the industry department shrank 23.4% compared to 37% in April, mostly due to large dip in outputs of steel (48.4%), cement (22.2), electricity (15.6) and refinery products (21.3%).

This is in line with expectation of most economists that April will be the worst hit due to the nationwide lockdown to contain the coronavirus outbreak while things will start to look up from May onwards.

Prime minister Narendra Modi and chairman of the 15th Finance Commission NK Singh have said that multiple green shoots of recovery are visible in the economy quoting fertilizer production numbers, auto sales and robust employment print.

The manufacturing Purchasing Manager’s Index (PMI) released by IHS Markit earlier this month stood at 30.8 in May, slightly better than 27.4 recorded in April but still well below the 50 mark that divides contraction from expansion. Maruti Suzuki India Ltd (MSIL), the country’s largest carmaker, reported sales of 18,539 vehicles in May after failing to sell a single unit in the preceding month. The company restarted production in a phased manner at two of its units last month after the government eased lockdown curbs. Unemployment rate has fallen sharply in recent weeks, coming close to the pre-lockdown weeks, according to Centre for Monitoring Indian Economy data.

The Fitch Ratings in its latest Global Economic Outlook (GEO) released on Tuesday said it still expects India’s GDP to contract by 5% in FY21. “In India, where authorities imposed one of the most stringent lockdowns globally to try to halt the spread of the virus, measures are being relaxed only very gradually; with a limited policy easing response and ongoing financial sector fragilities, we have pared our 2021 forecast to 8% from 9.5% in the previous GEO," it added.

Data separately released by the Controller General of Accounts (CGA) on Tuesday showed India’s fiscal deficit breached 58.6% in the first two months (April-May) of FY21 against 52% during the same period a year ago. With a severe squeeze in revenue receipts amid a marginal contraction in total spending, the central government’s fiscal deficit widened to Rs. 4.7 trillion in the first two months of what is sure to be a very difficult fiscal year amid rising demand for resources to fight the covid-19 pandemic. Prime minister Narendra Modi on Tuesday announced extension of free ration to 80 crore Indians for another five months at a cost of 90,000 crore which would put additional pressure on the fiscal.

India’s current account balance recorded a surprise marginal surplus at 0.1% of GDP in March quarter of FY20 against 0.4% in December quarter after a gap of 12 years on account of lower trade deficit and sharp rise remittance inflows, data released by the Reserve Bank of India showed. Current account deficit in FY20 narrowed to 0.9% from 2.1% in FY19 on the back of shrinking trade deficit. Mint reported on 21 June that with significant slump in domestic economic activity due to the coronavirus-induced lockdown that has significantly curtailed imports, the finance ministry was expecting the country’s current account balance to turn surplus only in the June quarter of FY21.

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