Trade bump boosts Indian economy temporarily

For the second month in a row, positive developments on the external sector front led improvement in India’s overall economic performance, with the Mint Macro Tracker looking a shade greener in March.

The tracker, launched last October, provides a monthly state-of-the-economy report based on trends across 16 high-frequency economic indicators. Of these 16 macroeconomic indicators, seven were in the green (above the five-year average trend) in March, while seven were in the red (below the five-year average trend).

This reading is a substantial improvement over what it was six months ago, the data shows. The improvement is almost entirely on account of India’s external sector performance. India’s trade deficit, as a percentage of its total trade, improved further in March after having bounced back to the green zone after 16 months in February. More importantly, the core (non-oil, non-gold) trade balance reported a surplus for the first time in five years. At the same time, the rupee gained strength against the greenback and recorded a higher-than-average appreciation rate in March.

With oil prices, despite recent uptick, still below their level a year ago, and a slowdown in India's domestic demand slowing its core imports, the current account deficit is set to narrow in 2019.

“… Add to that the positive outlook on capital inflows into the country for the next couple of months, and we may be looking at a balance-of-payments surplus,” wrote Pranjul Bhandari, chief India economist at HSBC in a recent report.

But this good fortune may not last. Already, the rupee has started losing strength against the US dollar. Hereon, any further increases in oil prices or a revival of demand for core imports would put pressure on the trade balance and the rupee.

Besides, the fault lines in India’s domestic economy are hard to ignore. As of March, all four consumption demand indicators were in the red, a worsening compared to six months ago. Domestic sales of passenger vehicles, tractors and two wheelers declined sharply from a year ago. Domestic air passenger traffic also grew below average in March.

Price signals also suggest weakening demand. Rural labour costs, as measured by rural wages, remain depressed, with rural wages growing below 5 percent for 17 straight months. While retail inflation increased marginally in March, the core inflation has slipped from the previous month’s level, again signalling weakness in underlying consumer demand. It is partly because of the weakness in the consumer economy that imports have been relatively subdued, helping improve the trade balance.

The recent rate cuts delivered by the RBI (Reserve Bank of India) coupled with the extraordinary measures adopted by it to boost liquidity (such as the dollar-rupee swap auctions) suggest that the GDP growth figures may be masking economic weaknesses, wrote the Bloomberg columnist Andy Mukherjee in a recent piece.

The industrial sector figures present a mixed picture. Non-food credit growth is rising and so is rail freight traffic but despite a marginal improvement, core sector growth (reflecting growth in India’s eight key infrastructure industries such as power, coal etc.) remains in the red. At the same time, the Purchasing Managers’ Index (PMI) for manufacturing is showing some loss in momentum in the sector, with its reading down to 52.6 from 54.3 a month ago.

The silver lining is that job sentiment shows a mild improvement as per RBI’s industrial outlook survey for the quarter ended March. This corroborates with the findings of Mint’s own survey with YouGov, also conducted in the March ended quarter.

Overall, the economy’s performance shows improvements compared to the past few months. But the domestic economy still remains on shaky ground. The next government will have to face tough choices as it grapples with a slowing consumer economy, anaemic investments, volatile commodity markets, and a potential global slowdown.