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File Photo: Pradeep Gaur/Mint
File Photo: Pradeep Gaur/Mint

Festive demand gives economy further push, but outlook uncertain

  • Seven of the 16 high-frequency indicators considered in Mint’s macro tracker are now in the green, marking its best performance since March

The Indian economy gained further momentum in September due to a sharply improved performance in the manufacturing sector. Seven of the 16 high-frequency economic indicators considered in Mint’s monthly macro tracker are now in green, or above their five-year-average trend. Eight are in the red, or below the five-year-average trend, while one is in line with it.

This is the best performance of the Indian economy on the tracker since covid-19 was declared a pandemic in March. In August, six of the 16 indicators were in green.

The progress in September was largely concentrated in the producer economy segment, where two of the four indicators are now in green. The composite Purchasing Managers’ Index (PMI) exceeded the five-year average for the first time in seven months. The index reading finally crossed the 50-mark after contracting since April. A PMI reading above 50 shows expansion in activity.

Rail freight traffic, a proxy for manufacturing activity, was 15% higher than last year’s level in September. This was the sharpest growth in over five years.

The two indicators of the producer economy segment that are still in red are those for which the September data is not yet available. Core sector output dipped 9% in August, the sixth straight month of contraction. Bank non-food credit grew only 6% in August, the slowest in almost three years. Fortnightly data shows some signs of pick-up in credit in early October, in line with elevated business activity.

The consumption segment also gained some momentum in September. Passenger vehicle sales rose to the highest level since January, and were 24% higher on year. Tractor sales were 60% higher than the previous month and 28% higher year-on-year. Domestic air passenger sales, however, remained deep in the red zone, with a 66% year-on-year drop. Broadband subscriber growth is in positive territory, but growth remains much below the five-year average level.

The gradual revival in the producer and consumption segments partly reflects the return of demand ahead of the festive season. Eased restrictions and rising public movement have aided the process. This shows in the sharp turnaround in revenues and profits for many companies in the September-ended quarter.

This overall pickup in the real economy has lifted India’s position among emerging market economies, too.

September also saw a turnaround in merchandise exports, which grew above the year-ago level for the first time since March. The growth was, however, moderate. In major labour-intensive sectors such as gems and jewellery, and leather products, exports were an area of concern. Overall, labour-intensive exports were 12% lower year-on-year, worse than the five-year average trend.

Three other indicators of the external economy segment—trade balance, import cover, and exchange rate—were in green. Trade deficit narrowed to a three-month low as imports remained weak even as exports picked up. The Indian rupee rose 1.5% against the US dollar in September.

Foreign fund inflows into Indian companies are likely to support the rupee, but some currency analysts believe the central bank will be reluctant to let the rupee appreciate beyond the 73 level. Since early September, the Reserve Bank of India (RBI) has added over $10 billion to its foreign exchange reserves, taking these to a record high of $555.5 billion as on 9 October.

The ease of living segment still looks bleak. Inflation remains high and core inflation is sticky at 5.4%. Inflation is likely to start easing in the coming months as vegetable prices correct, supply chain disruptions ease, and migrant workers return to cities, said analysts from Japanese brokerage Nomura.

The overall job outlook sentiment is better now than the last quarter, but a net 9% respondents to the RBI’s industrial outlook survey still believe jobs declined in the September-ended quarter. This was 29% in the previous quarter.

This makes the outlook uncertain for economic activity. In a report dated 19 October, Nomura said the underlying weakness in the jobs market showed that household incomes were still under pressure. This could be a medium-term headwind for consumer demand, said the report.

Data from early October suggests recovery in key segments has continued into this month. Last week, RBI governor Shaktikanta Das even said the Indian economy was now at the “doorstep of revival" from the coronavirus pandemic. But with the mixed signals from the macro tracker, the biggest question is whether consumer demand will sustain beyond the festive season.

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