Indian economy on road to recovery, some red flags remain

The Purchasing Managers’ Index (PMI) for manufacturing for the month of October 2021 came at 55.9, the highest since February 2021.

Two high-frequency indicators released on November 1 suggest that the Indian economy is on a steady path of recovery. The Purchasing Managers’ Index (PMI) for manufacturing for the month of October 2021 came at 55.9, the highest since February 2021. Goods and Services Tax (GST) collections for the month of October (they correspond to transactions in September) were ₹1.3 lakh crore, the second highest since the indirect tax was rolled out in 2017. The highest ever GST collections were

While PMI and CGA numbers are encouraging, concerns remain about the nature of the ongoing recovery. (Bloomberg file photo. Representative image)

Tax collection numbers are looking good

October’s GST collections were the second highest ever (for any month) since the tax came into being and comes in the backdrop of a pick-up in the overall fiscal situation in the month of September. Data from the Controller General of Accounts (CGA), which works under the ministry of finance, shows that both revenue collection and central government spending picked up momentum in the month of September. The latest trend is encouraging because it shows a pick-up in indirect taxes as well. A rise in direct taxes can be misleading about the general situation of the economy as only the relatively rich pay these taxes in India. An improvement in tax collections has been accompanied by a pick-up in government spending, both on the revenue and capital account. To be sure, inflation being higher – GDP and revenue numbers are more aligned with wholesale price inflation rather than retail inflation and the former has been rising at a faster rate – could also be a reason behind the improved fiscal performance.

But there are areas of concern as well

While PMI and CGA numbers are encouraging, concerns remain about the nature of the ongoing recovery. A research note by Nomura Global Markets Research notes that “growth signals are currently inconsistent” in the Indian economy and that even though Nibri has been rising, it does not reflect a broad-based recovery. “There was a whopping 13.3pp (percentage point) rise in the Google workplace mobility index across the week, even as the retail & recreation index dropped by 0.4pp and the Apple driving index fell by 6.3pp. The labour participation rate fell to 39.9% from 40.7%, while power demand has fallen for three consecutive weeks”, the Nomura note said. “Despite improving business resumption, railway freight revenues, and manufacturing PMIs, GST e-way bills as of end-October are lower than August/September levels. Credit growth, railway passenger revenues and traffic congestion have also been tepid. Core infrastructure sector growth eased to 4.4% y-o-y in September from 11.5% in August, driven by coal, electricity and cement, indicative of late monsoons and the early impact of the energy crisis, setting the stage for lower industrial production growth in the next few months”, the note added.

The moderation in the index of eight core sector industries has been continuing for some time. This index stood at 150.8 in March , fell to 125.4 by May on account of disruption from the second wave of Covid-19 and increased to 134.7 by July . It has fallen on a month-on-month basis in both August and September, and was at 126.7 in September.