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A tractor drives past a mural representing frontline warriors of the Covid-19 coronavirus painted on a pillar of a flyover in Noida on September 13, 2020.
A tractor drives past a mural representing frontline warriors of the Covid-19 coronavirus painted on a pillar of a flyover in Noida on September 13, 2020.

High-frequency indicators suggest India’s economy picking up pace

10 of the 16 high-frequency indicators considered in Mint’s macro tracker were in the red in August, marking an improvement over the previous three months

The Indian economy is picking up pace again, after being stuck in limbo for the past few months. The latest edition of Mint’s macro tracker shows that six of the 16 high-frequency economic indicators considered in the tracker are now in green or above their five-year-average trend. The remaining 10 are in the red, or below the five-year-average trend.

April saw the hardest hit on the economy, with the pandemic-induced lockdown in its most stringent phase. 14 of the 16 high-frequency indicators had turned red that month, the worst reading the tracker has seen since it was launched in October 2018 to provide a monthly report card on the state of the economy.

After a rebound in May, the recovery seemed to be losing momentum. In the May-July period, the reading remained the same: 12 of the 14 indicators in red. August marked an improvement for the first time since May, with the number of indicators in the red dropping to 10.

The outlook still remains clouded as the pandemic continues to spread, raising the risk of further localized lockdowns. The jury is still out on the sustainability of the recovery.

“There are reasons to be guarded about the prospects of recovery," said an ICICI Securities Primary Dealership report dated 14 September. A large part of the recovery in production activity may simply be inventory restocking, and in anticipation of future supply disruptions, the report said, adding that it will take some time for clearer trends to emerge.

For the last four months, all four indicators of the production activity considered in the tracker were in the red. With growth returning in rail freight traffic, that count reduced to three in August. But this growth must be taken with a pinch of salt. The 4% growth in rail freight is partly because of a low base effect. In August last year, freight traffic had declined 6%. Meanwhile, the other three indicators of the producer economy segment--the composite Purchasing Managers’ Index (PMI), core infrastructure sector growth, bank non-food credit-- are still in red.

The composite PMI, which measures combined growth in manufacturing and services, rose to 46.0 in August from 37.2 in July, but continued to signal contraction. The manufacturing sector rebounded sharply in August (52.0) but contraction in services (41.8) weighed on overall economic recovery. Core sector growth, published with a month’s lag, continued to contract in July (-10%) but the rate of contraction declined. The last time the core sector had expanded was in February. Bank non-food credit grew only 6.7% in July, the same as the previous month.

There are signs of improvement in the consumer segment as well. Two of the four consumption indicators were in green in August and two in red. Passenger vehicle dispatches picked up in August to levels higher than last year. For the first time in 20 months, passenger vehicle dispatches grew year-on-year. Again, this growth was on a low base and partly in anticipation of higher festival sales. Retail sales remained subdued in August.

Tractor sales showed sharp improvement (75%) in August, helped by rising rural demand. 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.

Consumption indicators could improve further in the coming months because of pent-up demand and the festive season.

Surveys by Nielsen suggest that the consumer sector has been hit hard by the pandemic, with the demand recovery in non-essentials still muted

so far. The demand for essentials has recovered, largely driven by pent-up demand in rural India.

Even as domestic demand has seen a rebound, weak global demand meant that exports weighed down on the recovery in the manufacturing sector. After continuously rising since May, India’s merchandise exports fell for the first time in the month of August, widening the trade gap. Exports in labour-intensive goods, in particular, remain depressed, adding to the stress in the job market.

India’s financial metrics were more resilient in August but the stock market correction over the past few weeks has raised fears that markets may not remain buoyant in the months ahead.

The data for the coming months will give a better sense of how quickly the Indian economy can be expected to get back on track.

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