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Home / India News / A review of economy in 1st half of FY 2020-21

A review of economy in 1st half of FY 2020-21

Experts maintain that the economy continues to face significant headwinds on the road to sustained growth revival. While September quarter GDP numbers will only be released in November, other high frequency indicators will give a better picture of the economy in the next few days.

india Updated: Oct 02, 2020, 02:52 IST
Roshan Kishore
Roshan Kishore
Hindustan Times, New Delhi
A worker gives finishing touches to a cricket bat at a factory on the outskirts of Jammu.
A worker gives finishing touches to a cricket bat at a factory on the outskirts of Jammu.(AP)

The first high-frequency economic indicator released in October has brought good news on the economic front. The Purchasing Managers’ Index (PMI) for manufacturing clocked a value of 56.8 in September. This is the highest reading in over eight-and-a-half years, according to IHS Markit, the agency that conducts the survey. September is the second consecutive month PMI manufacturing has been above the neutral threshold of 50. The revival in August and September is in keeping with an improvement in the Nomura India Business Resumption Index (NIBRI) during the period. NIBRI improved from around 70 to above 80 between July and September.

These improvements notwithstanding, experts maintain that the economy continues to face significant headwinds on the road to sustained growth revival. While the September quarter GDP numbers will only be released in November, other high frequency indicators will give a better picture of the economy in the next few days.

Record PMI might not guarantee GVA manufacturing growth

PMI manufacturing rose to a record 56.8 in September. A PMI value above 50 signifies expansion in economic activity. Average PMI manufacturing in the quarter ending September was 51.6, a sharp rise from the average value of 35.1 in the June quarter. The revival in PMI, however, has not been able to prevent job losses – on account of the difficulty in hiring workers as well as social distancing norms for the coronavirus disease, leading to a reduction in the workforce – and employment fell for six consecutive months. “While uncertainty about the Covid-19 pandemic remains, producers can at least for now enjoy the recovery”, said Pollyanna De Lima, economics associate director at IHS Markit.

PMI revival need not translate into actual growth in manufacturing. “The improvement in PMI for September was expected and corresponds to the Unlock process that is prevalent in the economy. While the PMI at 56.8 does reflect significant improvement over August and the other preceding months, it does not present a picture on the year-on-year numbers which will be out when the IIP {Index of Industrial Production} numbers are announced, which will be in the negative zone”, said Madan Sabnavis, chief economist at CARE Ratings.

Also Read: September’s GST revenue best of this fiscal as business activity picks up

Experts advise caution in reading too much into PMI numbers. “PMIs are a sluggish measure and managers end up comparing the current month to the last few months rather than just the last month, bringing in some inertia. As such, PMIs may not be ideal for tracking turning points”, a research note by Pranjul Bhandari and others from HSBC Securities and Capital Markets India Private Ltd pointed out in July. Recent statistics support this argument. For example, the index of eight core sector industries contracted (on an annual basis) 8.5% in August compared to 8% in July. However, PMI manufacturing improved from 46 in July to 52 in August.

Investment continues to be weak

As rising Covid-19 infections cloud consumer and business sentiment, investment demand remained weak. According to the capital expenditure database of the Centre for Monitoring Indian Economy (CMIE), both new investment announcements and investment projects paint a grim picture. New investment announcements (by value) contracted by 82% in the quarter ending September, the highest since June 1996, the earliest period for which data is available. Annual contraction in the value of investment projects completed recovered from its all-time high of 72.9% in the June quarter, perhaps a result of the unlocking of the economy. Yet, it saw the second highest contraction of 62.9% in the September quarter.

Also Read: India’s fiscal federalism crisis is not the pandemic’s creation

In another development on the capex front, cumulative central government capital expenditure in the current fiscal year fell below last year’s levels in August after having remained high until July. According to figures released by the Controller General of Accounts(CGA), which works under the ministry of finance, total capital expenditure in April-August was Rs 1,34,447 crore against Rs 1,36,176 crore in the same period last year. With state finances confronting a crunch, capex by state governments is unlikely to keep up with last year’s levels.

In an interview to HT, finance minister Nirmala Sitharaman said she was open to the idea of a second fiscal stimulus. While the Atmanirbhar Bharat package announced in the month of May was to the tune of 10% of India’s GDP, its fiscal component was much smaller, at just over 1% of GDP. To be sure, there is little clarity on how the centre will finance a second stimulus. CGA numbers show that all revenue heads except union excise duties had lower realisations than last year until August. The government has kept its borrowing limit for 2020-21 unchanged at Rs 12 lakh crore, a figure which was decided in May.

PMI services and RBI’s forward looking surveys will give greater clarity

At least two set of numbers will be required for greater clarity on the nature of the ongoing economic recovery. The first is PMI services (to be released in the next couple of days) for September. The second set of numbers, which should have been released on October 1, are the trends from Reserve Bank of India’s bimonthly forward-looking surveys, especially the consumer confidence survey (CCS).

Also Read: Retail inflation grew at 6.7% in August

PMI services has contracted for six consecutive months now. The service sector has a bigger share in both output and employment than manufacturing. Unless there is a broad-based revival in services, aggregate demand would continue to remain tepid. The fact that the latest Unlock guidelines announced on Wednesday have allowed resumption of most economic activity except international flights should give a boost to normalisation of service sector activity. Whether the tailwinds from Unlock will be overpowered by headwinds from infections remains to be seen.

With rising cases of Covid-19, weakness in labour markets and continuing economic uncertainty, consumer behaviour might have shifted towards increasing precautionary savings. Consumer sentiment on key metrics such as the current economic situation, employment and spending on non-essential items had plummeted to an all-time low in July.

If the Reserve Bank of India’s Monetary Policy Committee meeting had not been postponed from Tuesday to Thursday, the results of the consumer confidence survey would have been out on Thursday. The CCS numbers will indicate whether consumers will go out and spend during the coming festive season or save as much as they can for fear of worse times ahead.

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