India’s economy recovery steadies, but remains K-shaped

What is the state of the Indian economy at the moment? When the National Statistical Office (NSO) releases GDP statistics for the June quarter at the end of this month, the picture will become clearer.

What is the state of the Indian economy at the moment? When the National Statistical Office (NSO) releases GDP statistics for the June quarter at the end of this month, the picture will become clearer. However, various high frequency indicators including those from recently released forward-looking surveys of RBI can give a broad picture of the state of the Indian economy. Here are three charts which explain this in detail.

(AFP)

Growth prospects look steady

“Domestic economic activity remains resilient”, the Monetary Policy Committee (MPC) of RBI said in its resolution released last week. Monthly Purchasing Managers’ Indices on manufacturing and services support MPC’s conclusion. Both PMI manufacturing and services have stayed above the critical threshold of 50 – this signifies expansion in economic activity over last month – for the past 12 months. To be sure, MPC, in its growth projections has noted that there continue to be downside risks . However, what matters is that MPC has not made a downward revision to its growth projections between the June and August meeting. This is despite the fact that IMF’s August update to the World Economic update made a downward adjustment of 80 basis points – one basis point is one hundredth of a percentage point – to its April forecast of 8.2%.

The more important question concerns the growth trajectory

While there is little doubt that there is an economic recovery underway, the more important question is whether the Indian economy can once again enter a sustainable high-growth trajectory. Simple statistical comparisons are of little help here because future growth rate projections come on the back of a pre-pandemic slowdown and contraction due to the pandemic’s disruption. One way to answer this question is to look at the state of the investment cycle, which, it can be argued, will only start recovering when industries feel that the existing capacity is proving to be inadequate to cater to demand. New capex announcements in manufacturing may provide a basis for this; the Centre for Monitoring Indian Economy (CMIE) database gives this data, as a share of quarterly gross value added in manufacturing. Looking at the relative, not absolute trend in new capex announcements -- they are largely an indicator of sentiment regarding future growth -- is a better measure than absolute capex numbers because the latter can show an improvement even if its relative size to the economy is small. Data shows that new capex announcements as a share of manufacturing have been increasing along with the rising trend in capacity utilisation as seen in the RBI’s survey. This suggests that the investment cycle might finally be showing early signs of revival.

But the Consumer Confidence Survey continues to point towards an unequal recovery

This might sound counterintuitive because the headline consumer confidence numbers continue to show an improvement. The Current Situation Index (CSI) – it is 100 added to the average of net responses of various aspects on which data is collected -- stood at 77.3 in the July 2022 round, which is the closest to March 2020 value it has been, since the pandemic struck. However, there is good reason to believe that headline consumer confidence numbers are showing a positive bias due to a favourable base effect. A detailed look at the scores on current perception on income can explain this. The current perception survey asks respondents whether their income has increased, decreased, or remained the same compared to where it was a year ago. The net current perception is just the difference between share of respondents who report an improvement and those who do a worsening. What is important to keep in mind is the fact that for respondents in the July round, the benchmark for comparison with present income levels is the July 2021 value when incomes were likely lower compared to the pre-pandemic level. This means that respondents who report a similar income level compared to last year are actually worse off in economic terms. A comparison of all three responses – increased, decreased and remained same – shows that there has been a large increase in the share of respondents who have reported similar income levels and an almost equal decline in the share of respondents who reported a decline in income levels. The share of respondents who reported an increase in income levels compared to a year ago is actually very small. This suggests that incomes of a large number of people in urban areas – CCS is conducted in 13 major cities – are actually stuck at levels where they were a year ago. Because there is more than enough evidence to show that overall GDP and formal sector activity has increased significantly compared to that period -- this is what indicators such as PMI suggest -- it lends support to the theory that the post-pandemic recovery has been driven by only a section of the overall economy. This is in keeping with the narrative of a K-shaped recovery.