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Photo: Mint

Indian economy sees a mild recovery from April’s lows

Twelve of the sixteen indicators tracked by the Mint Macro Tracker were in the red as of May, a marginal improvement over April

The Indian economy is looking slightly better than it did a month ago, largely because of positive developments on the external sector front, the latest update of the Mint Macro Tracker shows. But the overall recovery remains sluggish with industrial production and domestic consumption struggling to pick up even as lockdown restrictions eased.

As of May, 12 of the 16 macroeconomic indicators considered in the tracker were in the red (below their five-year growth trend) and four were in green (above their five-year growth trend). This is a slight improvement over last month when 14 of the 16 indicators were in red, the worst reading of the tracker since its launch in October 2018.

The improvement is driven by the external sector, with India’s trade balance (as a percentage of total trade) and the currency rate back in the green after sharp declines in April. The rupee appreciated 0.7% in May after depreciating 2.4% in April, while the trade deficit narrowed to 7.6% from 24.6% in April.


In addition to the improvement in the trade balance, May saw an improvement in the Reserve Bank of India’s foreign exchange reserves. Forex reserves hit a historic high of $500-billion recently, enough to cover about 17 months of imports.

But these improvements on the external sector front mask significant weaknesses in the domestic economy. The improvement in trade balance, for instance, is due to an easing import bill and not because of a pickup in exports. India’s merchandise exports fell sharply in May (-36%) even if not as dramatically as in April (-60%). The increase in the import cover, too, has more to do with the shrinking import bill on account of trade disruptions and a sharp fall in global oil prices, than the rise in dollar inflows.

The Indian economy continues to face internal risks with muted improvement in domestic consumption and industrial production last month. As of May, all indicators of consumption demand and industrial production were in the red. On the consumption front, domestic tractor sales (-55%) and domestic air passengers flown (-98%) in May were sharply lower compared to last year. Passenger vehicle sales, which drew a blank in April, have not yet been published for May. A CRISIL report dated 11 June said passenger vehicles sales volume (including exports) could plunge by 22-25% this fiscal to a decadal low of about 26.5 lakh units.

While India started reopening factories in early May, its industrial sector remained in contraction mode, the composite Purchasing Managers’ Index (PMI) suggests. India’s composite PMI was at 14.8 in May, a slight improvement over last month but among the lowest globally. A PMI reading below 50 indicates contraction.

India’s rail freight traffic also continued to contract in May (-21%). India’s core infrastructure sector growth (which captures trends in eight key industries—electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers) and non-food credit growth are only available with a month’s lag. As of April, both were hovering sharply below their trend levels.

Meanwhile, the picture on the ease of living front remains clouded due to gaps in data. For the last two months, India’s statistics agency has only released India’s retail inflation for some sub sectors. Adding those up, economists at Nomura estimated the ‘truncated’ inflation (based largely on food and beverage items) to have fallen to 6.9% in May from 8.3% in April. Assuming the prices of the rest of the consumer price index (CPI) basket was unchanged, they estimated headline inflation to be at 5.6% in May, down from 6.4% in April.

With massive layoffs across industries, job outlook is unlikely to look pretty in the current quarter. According to the Centre for Monitoring Indian Economy (CMIE), the urban employment rate averaged 25.4% in Apr-May compared to an average of 9.3% in the Jan-Mar period.

With the virus spreading more rapidly in India than before, the economic outlook remains bleak for the coming months. The rising case count will keep mobility constrained across the country. Already some states have reimposed shutdowns in response to the surge in infections. This uncertainty suggests that consumption and investment will take longer to recover than anticipated. Meanwhile, the ongoing trade disruptions will make it difficult for exports to pick up. India’s economic momentum is already lagging most of its emerging market peers. (https://www.livemint.com/news/india/manufacturing-slump-pulls-india-down-in-em-league-tables-11592378862509.html). The only engine still firing in this economy is the government, and it needs to deploy heavier artillery if the economy is to roar back to life again.

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