Trade gives some relief to a slowing Indian economy
Consumption demand weighs on India’s economic growth, even as the external sector turns marginally favourable, shows Mint’s macro tracker
The Indian economy is looking slightly better than it did a month ago, because of positive developments on the external sector front, according to the latest update of the Mint Macro Tracker. But the tracker also reveals that the overall performance remains sluggish with weak domestic consumption continuing to drag down the economy.
The Mint Macro 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 February, while eight were in the red (below the five-year average trend).
This reading is marginally better than what it was six months ago, and even a month ago, the data shows. The improvement is partially driven by the external sector where India’s trade balance (as a percentage of its total trade) is back in the green after 16 months.
Importantly, though, this improvement in India’s trade balance is on account of an easing oil import bill, and not a pick up in exports, which continue to grow at a sluggish pace. With the US set to withdraw the Generalized System of Preferences (GSP) programme for India, amid a cyclical slowdown in the global economy, exports will be hit further in the coming months.
In addition to trade balance, there has been a marginal improvement in the Reserve Bank of India’s foreign reserves, which provides more import cover.
Meanwhile, the Indian economy continues to face internal risks with domestic consumption demand refusing to pick up. As of February, all four consumption demand indicators were in the red. Automobile sales continued to underperform (below the five-year trend growth) for the eighth straight month, as sales of tractors and two-wheelers declined.
All of this indicates weak demand in both the urban and the rural sectors of the economy. The weakness in consumption demand—a result of the liquidity crunch in the non-banking financial company (NBFC) space and rural sector distress—is likely to continue over the coming months. Weak consumption demand could damage industrial production growth as well.
Already, core sector growth (which captures trends in eight key industries—electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers) is hovering below trend levels.
Overall industrial performance is still a mixed bag, though, with February’s purchasing managers’ index (PMI) manufacturing index at a 14-month high. Non-food credit growth too improved, but partly due to a low base, and so does not necessarily suggest an expansion in credit off-take.
According to the IHS Markit survey, despite a marginal increase, overall business sentiment in February remained weaker than the average levels across emerging markets.
Optimism regarding business activity was even weaker among services sector firms. Finally, one consistently positive indicator in recent months—inflation—continues to remain benign even after a recent uptick.
But growth in rural wages continues to be disappointingly low. And, while there is a marginal improvement in the job sentiment, the actual employment scenario is gloomy if recent reports from the National Sample Survey Office data are anything to go by. Reviving consumption demand will be critical for Indian economic growth in the coming months.
A consumption-oriented budget and the Reserve Bank of India’s about-turn towards dovishness are important steps to that end, but transmission of reduced rates will be slow and potentially uncertain. And, with the Lok Sabha elections drawing close, consumption spending and investment could worsen in the interim, further dragging economic growth with it.
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First Published:28 Mar 2019, 01:47 AM IST
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