No festive cheer in the economy

The Indian economy’s momentum continued to slow in September, with most indicators of domestic demand still flashing red, the latest edition of the Mint Macro Tracker shows.

The tracker, launched last October, provides a monthly state-of-the-economy report based on trends across 16 high-frequency economic indicators. September was the fourth month in a row when half or more of the sixteen indicators were in red (below the five-year average trend). Only four indicators were in green (above the five-year average trend) for the latest month, while three maintained the trend.

The current edition of the tracker marks a few changes to better capture the state of the Indian economy. Given the growing role of services in the economy, the PMI manufacturing index has been replaced with the PMI composite index (capturing both manufacturing and services). Also, to keep track of India’s growing internet economy, the broadband subscriber numbers have been incorporated in the tracker. A new measure of growth in labour-intensive exports has been introduced to capture trends in key labour-intensive industries, which also tend to have significant linkages with India’s vast informal sector, on which data is hard to come by. Finally, instead of capturing nominal rural wages, the tracker will capture real rural wages (adjusted for rural inflation) starting this month.

An analysis of the historical data for these and the other indicators (which have been retained in the revised tracker) show that the latest reading shows little improvement compared to the previous month (August) and a significant deterioration compared to the six-month ago period.

All four variables of the consumer economy—passenger sales growth, broadband subscriber growth, tractor sales growth and domestic air passenger growth—have been in red for eight successive months now. The slump in consumption has been at the forefront of the recent slowdown, with the biggest hit seen in the automobile sector. According to an October 17 UBS consumer survey report, though, the demand for both two-wheelers and car sales is likely to pick up in the second half of the ongoing financial year. But even with a pick-up in demand, production growth could take longer to kick in given the inventory buildup.

The production side of the economy, gauged by indicators such as the PMI composite index, core sector growth, rail freight traffic and banks non-food credit, also continues to struggle. The biggest decline comes in PMI composite index which slipped to 49.8 in September from 52.6 in August, dragged down by the dismal performance of the services sector. A PMI reading above 50 indicates expansion in activity, while a reading below 50 indicates a contraction. Core sector growth, too, turned negative as the contraction in rail freight traffic worsened. The only production indicator in the green was bank non-food credit growth, which saw above-trend growth but was still at a 17-month low in August.

The only sector of the economy that saw some relief was the external sector with the trade balance improving slightly. But even that improvement comes because of falling imports rather than growing exports. According to the latest data, labour-intensive export growth, which includes exports from a range of industries (e.g. tobacco, garments and handicrafts), has actually fallen.

No surprise then that the job outlook is looking grimmer. RBI’s latest industrial outlook survey, which polled responses from 481 companies, showed net responses from companies on the jobs parameter dipped significantly from a positive 8.6 per cent in the June quarter to a negative 0.9 per cent in the September quarter. The net response is the percentage difference between the respondents bullish about jobs and those pessimistic about jobs.

Making matters worse, food inflation pushed headline CPI to a fourteen-month high of 4.0% in September. “There are signs that the subdued rural food inflation is starting to catch up with the far more sturdy urban retail food inflation,” wrote an ICICI securities report released last week. If such a trend continues, it could drag down real rural wages, which have maintained an above-average growth trend in recent months.

Taken together, these indicators paint a bleak picture of the Indian economy and reinforce the recent calls for urgent policy action from both economists (including Abhijit Banerjee and Raghuram Rajan) and multilateral organizations.