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The industrial sector indicators offer mixed signals (Mint file)
The industrial sector indicators offer mixed signals (Mint file)

No recovery in sight for the Indian economy

The Mint Macro Tracker for June shows no signs of improvement, and indicates an intensified domestic slowdown even as external sector vulnerabilities appear less severe than before

India’s economic slowdown shows no signs of abating, with a sizeable number of indicators of domestic demand still flashing red in June, 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.

Of these 16 macroeconomic indicators, six were in the green (above the five-year average trend) in June and eight were in the red (below the five-year average trend), while the other two maintained the trend.

The latest reading is in line with the reading in May (when eight indicators were in the red) and a significant deterioration compared to the readings in March and April (when six indicators were in the red).

The overall reading in June remained unchanged despite some improvement on the external front. The improvement on the external front in June was largely because of fresh incoming data on the current account balance as a share of the gross domestic product (GDP), which narrowed sharply in the quarter ended March, the latest period for which the ratio is available. India’s current account deficit (CAD) narrowed sharply to 0.7% of GDP in the March quarter, from 2.6% in the third quarter ended December, primarily on account of a lower trade deficit, even as foreign portfolio inflows remained robust. However, that performance is not likely to be repeated, with the trade deficit in the red over the past quarter.

The improvement on the external front, also reflected in the rising import cover, is partly because of weak imports, indicating weak underlying demand in the economy. While lower crude oil prices explain part of the fall in the value of imports, the contraction in imports of items such as transport equipment, machinery and fertilizers indicate that domestic demand remains weak.

This is corroborated by the slowdown in the consumer economy and industrial sector indicators. All four indicators the consumer economy — passenger vehicle sales, tractor sales, two-wheeler sales and domestic air passenger growth — continue to be in the red for the fifth straight month, with the first three indicators showing a decline (negative growth) over the year-ago period.

Three of the four industrial sector indicators are either flashing amber or have turned red. The core sector growth has turned red, dropping to a 50-month low of 0.2% growth in June, the latest data shows. Rail freight traffic also has turned red (below five-year average) and the purchasing managers’ index (PMI) is flashing amber (in line with the five-year average).

Only the non-food credit growth indicator is in the green.

However, weak demand conditions and the stress in the NBFC sector may impact drag down credit offtake as well. Already, there are reports suggesting that lenders are turning cautious in lending to the auto sector.

“The persistence of weak demand conditions across multiple sectors might precipitate an adverse feedback loop between the real economy and the financial sector," an ICICI securities report dated 30 July warned.

Meanwhile, inflation continues to remain benign with core inflation at its lowest level in almost two years. This again reflects weakness in consumption demand. Rural India appears particularly badly hit, with rural wage growth in the red for two years now. The delayed and erratic monsoon this year may have further dampened rural sentiment.

With global economic uncertainties rising and with fresh investments in the country at a 15-year-low, the outlook for the Indian economy does not appear bright.

It comes as no surprise that multilateral institutions such as the IMF and ADB as well as the Reserve Bank of India (RBI) have pared down India’s growth forecasts over the past few weeks, citing both rising risks to global economic growth as well as weakening domestic investment activity for their subdued forecast.

Some economists believe that the actual growth of the economy could be far lower than what the official projections (and those of multilateral institutions based on those projections) suggest because of the methodological changes in the new GDP series. In a Harvard University working paper published earlier this month, India's former chief economic adviser Arvind Subramanian argued that there is 'high likelihood of there being large over-estimation' in India's new GDP series, reiterating his earlier criticism of the official GDP estimates, and argued that the actual growth rate could be in the range of '3.5% to 5.5%'.

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