Some warning signs in India’s economic report card

After a historic contraction in the July-ended quarter, when India’s gross domestic product (GDP) declined 24% compared to the year-ago period, economists expect India’s economic contraction to be narrower in the Sep-ended quarter. The official figures are due for release later this week.

However, high-frequency indicators tracked by Mint suggest that the economic recovery could be losing steam. 6 of 16 high-frequency economic indicators considered in Mint’s monthly macro tracker were in green, or above their five-year-average trend, as of October. Eight were in the red, or below the five-year-average trend, while two were in line with it. This is a slight deterioration from September, when eight out of the 16 indicators were in green and eight in red, the latest update shows. This was also the worst tally on the scoreboard since July.

Launched in October 2018, Mint’s macro tracker provides a monthly state-of-the-economy report based on trends in 16 high-frequency indicators across 4 segments: consumer economy, producer economy, external sector, and ease of living.

Only one indicator of the consumer economy segment, passenger car sales growth, was in green as of October. Passenger car sales or wholesale dispatches during the month were 11% higher than last year. The growth moderated from the month ago (24%) but remained higher than the long-term average. Retail registration data however suggests that motor car registrations fell 3% compared to the year-ago period in October, according to the Vahan dashboard.

The other indicators remain a disappointment. The growth in tractor sales dropped from above-trend levels to about 8%, a level consistent with the trend. This is a sharp slowdown from the high double digit growth in tractor sales in the June-September period. The number of domestic air passengers flown in October were 57% lower than the same period last year. The contraction was more moderate compared to last month, possibly on account of festive travelling, but still sharply below the trend growth. Broadband subscriber data is available with a few months’ lag. The latest data, as of August, shows that the growth in subscriber base (16%) remains much below normal.

Signals from the producer economy segment have been mixed. The composite Purchasing Managers’ Index (PMI) rose to a record 58.0. The momentum in rail freight traffic continued, with a 15% growth in October. But the two other indicators, available with a month’s lag--core infrastructure growth and non-food credit growth--remained in the red. The core infrastructure index was 1% below last year’s level. The contraction in the core sector has narrowed in the last seven months but its performance is still well below the historical average. Non-food credit growth (5.8%) was the slowest since August 2017. Fortnightly data from the Reserve Bank of India does not suggest any marked improvement in early November.

Some other high-frequency indicators such as Goods and Service Tax (GST) collections and diesel consumption,improved in October. Mobility also continued to improve during October.

But October also saw a downturn in merchandise exports, which slipped below the year ago level, having briefly recovered in September. In major labour-intensive sectors such as gems and jewellery, and leather products, exports remained subdued. Overall, labour-intensive exports were 12% lower year-on-year, worse than the five-year average trend. This suggests that the stress in the job market continues.

The ease of living segment still looks bleak, especially due to unrelenting inflationary pressures. Inflation remains elevated and core inflation is sticky at 5.5%. The fall in exports along with the surge in inflation pulled India down in the emerging market (EM) ranks in October.

With the sharp decline in exports, India’s trade deficit widened although it is still better than the historical average because of weak imports. India’s import cover surged to a record high because of rising forex reserves and subdued imports. The rupee appreciated only slightly (0.1%) against the dollar in October, marking an end to the above-trend growth seen in the three preceding months.

The economic recovery will hinge on the sustainability of demand after the festive season. Restrictions in mobility imposed by local authorities to curb a second surge in covid-19 cases across states could dampen movement of people and crimp demand, at least till a vaccine is widely available. Early deployment of a covid-19 vaccine could stave off these risks and help bring the economy back on track faster.