Four questions about economic data in Aug ’21

Here are four questions, rooted in economic data to be released in August, which will shape the economic narrative going forward.

In its July update to the World Economic Outlook (WEO), the International Monetary Fund downgraded India’s 2021-22 growth to 9.5% from its April projection of 12.5%. The main reason for the downgrade was the severe second wave of Covid-19 infections in the country. Gita Gopinath, the IMF chief economist, said that a (potential) third wave could further damage India’s growth prospects. To be sure, there is still a lot of time left for this fiscal year to end. And, if there is one thing which the pandemic has done to economic forecasts, it is that long-term projections have never been less reliable. Here are four questions, rooted in economic data to be released in August, which will shape the economic narrative going forward.

Gita Gopinath, the IMF chief economist, said that a (potential) third wave could further damage India’s growth prospects.(Reuters)

1) Will NIBRI cross 100 and stay there?

The pandemic has moved economy tracking from a quarterly affair to a monthly, even weekly affair. One of the most popular post-pandemic indicators has been the Nomura India Business Resumption Index (NIBRI). A NIBRI value of 100 refers to pre-pandemic levels of economic activity. After falling to 45.4 on May 3, 2020, NIBRI gradually recovered to 99.3 in the week ending February 23, 2021. It started falling gradually thereafter, reaching 94.6 in the week ending March 28. As infections surged in April, it fell even more sharply. It reached 75.9 in the week ending April 25 and then to 60.3 in the week ending Mar 23. The second wave of Covid-19 infections peaked on May 9, in terms of seven-day average of daily new cases. Unlike during the first wave, NIBRI has seen a V-shaped recovery after the second wave to reach 96.4 in the week ending July 18. There was a marginal fall in NIBRI value in the week ending July 25, when it was at 95.3. The latest fall in NIBRI could well be a result of high rainfall in large parts of the country rather than fresh restrictions due to the pandemic, as no such restrictions have been imposed. The question to ask going forward is how soon NIBRI will reach 100 for the first time since the pandemic began.

2) Will PMI cross 50 in July and August?

Easing or removal of restrictions is only a necessary, not a sufficient condition for economic recovery. Two additional factors matter. The first is demand. If income shocks during the lockdown are significant enough, demand side headwinds can stall economic recovery even after restrictions are removed. The other important factor, especially as far as the contact intensive services economy is concerned, is the progress of vaccination. Unless a critical mass of people is vaccinated and the threat of getting infected comes down significantly, a full-scale recovery will continue to elude the services economy. As of now, 37% of the eligible population has received at least one dose of the Covid-19 vaccine. There was a reflection of both these factors in the June Purchasing Managers’ Index (PMI) numbers for manufacturing and services. Both were lower in June than in May, even though the infection curve was more severe in May than in June. These numbers were also below the critical threshold of 50 . A PMI value below 50 signifies contraction in economic activity compared to previous month. It remains to be seen whether PMI numbers for July jump back above the 50-mark.

3) Will retail inflation come below 6%?

This is perhaps the most important question confronting policymakers. Retail inflation, as measured by the Consumer Price Index has been above 6%, the upper limit of RBI’s tolerance level in May and June. Prices of fuel and edible oil have been the major drivers of inflation so far. While prices of petrol and diesel have not increased since July 17 and July 15, they have not come down either. As of now it also appears that the deal among Organisation of Petroleum Exporting Countries (OPEC) to gradually increase crude oil production has not had a major effect on prices. The price of India’s crude oil basket, as per data from the ministry of petroleum, was $74.2 per barrel on July 29. “Commodities as a whole have risen more than 20% this year, and around 50% in the case of crude oil. The Bloomberg Commodity Spot Index is at a decade high and heading for its fourth-straight monthly increase. Big Oil companies and miners, awash with cash, are returning billions of dollars to shareholders through dividends and buybacks. Few analysts expect the gains to reverse soon and many think they’ve got further to run”, a Bloomberg story published on July 30 said. To be sure, even core-inflation, the non-food non-fuel component of the CPI basket has been high in India, which makes inflation a broad-based problem at the moment. While officials at both RBI and government continue to maintain a brave face on inflation, terming it as a transient problem, if the headline number does not come down, pressure will increase towards rolling back the accommodative stance of monetary policy in the near future.

4) Will June GDP growth meet the RBI’s forecast of 18.5%?

The most important economic statistic of the fiscal year 2021-22 will come on August 31 when the GDP growth numbers for the quarter ending June are released. The Indian economy suffered its highest ever contraction of 24.4% in the quarter ending June 2020. This was a result of the 68-day long lockdown which was imposed from March 25. The gradual sequential recovery – the economy contracted by 7.4% in the quarter ending September 2020 before growing at 0.46% and 1.64% in the quarters ending December 2020 and March 2021 – was interrupted by the second wave in April and May. Most economists, both within the government and outside, have maintained that the second wave’s economic disruption was not as big as that of the first wave. The June resolution of RBI’s Monetary Policy Committee has predicted a growth rate of 18.5% in the first quarter of 2021-22. This means that the economy is not expected to regain the pre-pandemic levels even after two years. If the actual growth falls short of even this number, economic confidence could take further beating.