Reading another set of high frequency numbers on the Indian economy

One set of high-frequency numbers on economic activity, such as the Purchasing Managers’ Index, Nomura India Business Resumption Index, etc., look good. But these numbers might not be telling us the entire story.
When the June quarter GDP numbers were released in August, there was a lot of enthusiasm about the role of exports in India’s post Covid-19 growth trajectory.
When the June quarter GDP numbers were released in August, there was a lot of enthusiasm about the role of exports in India’s post Covid-19 growth trajectory.
Updated on Oct 05, 2021 01:52 AM IST
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ByRoshan Kishore, Hindustan Times, New Delhi

What is the state of the Indian economy as it enters into the second half of the fiscal year 2021-22? One set of high frequency numbers on economic activity, such as the Purchasing Managers’ Index, Nomura India Business Resumption Index, etc., look good (see bit.ly/2YkH8E0).

But these numbers might not be telling us the entire story for two reasons. One, they are skewed towards the formal sector of the economy. And two, they do not take into account headwinds to growth from avenues such as external trade. This is why it makes sense to look at another set of statistics, which look at India’s external trade, capital investment, etc. Here are four charts that explain this argument.

Can exports lead the post-Covid growth story?

When the June quarter GDP numbers were released in August, there was a lot of enthusiasm about the role of exports in India’s post Covid-19 growth trajectory. There was a valid reason for this. India’s exports, at 7.68 lakh crore (in 2011-12 prices) in the June quarter were not just above the pre-pandemic level of 7.07 lakh crore of the June 2019 quarter, but also almost at par with the all-time high figure of quarterly exports (March 2019 quarter). That exports increased between the March and June quarters despite the disruption inflicted by the second wave of Covid-19, which led to a quarter-on-quarter decline in other macroeconomic aggregates, generated a lot of optimism around tailwinds from exports to overall growth.

A June analysis in these pages looked at the promise of export-driven growth in India and argued that any assessment about the net impact of foreign trade on GDP growth must include the role of imports as well (see bit.ly/3Fed6Tc).

The latest trade numbers underline this point. India’s trade deficit in September reached an all-time high of $22.9 billion, thanks to a sharp rise in imports, which jumped to a record $56.4 billion. While a rise in oil prices has played a big role in the rising deficit, it is not the only reason. Exports have stalled as well, triggering an increase in the non-oil deficit.

“The increase in oil imports was not due to price effects but rather reflects a sharp jump in import volumes, despite a more gradual domestic recovery. We believe this may have been due to lagged/bunched up oil import contracts or inventory restocking and see this as anomalous. However, the underlying trend of the widening trade and current account deficit is likely to continue, driven by higher oil and other global commodity prices, the domestic growth upcycle and an overhang on exports due to global supply bottlenecks in the near term and softer demand next year,” said a note by Sonal Varma and Aurodeep Nandi, economists at Nomura Global Markets Research. “We expect the current account to swing from a surplus of 0.9% of GDP in Q2 to a deficit of 1.8% of GDP in Q3 2021 (July-September).”

Is private investment finally picking up?

The biggest question around economic recovery is whether the investment cycle has picked up. This is especially relevant because fiscal policy, at least at the level of the union government, has clearly adopted a pro-capital expenditure rather than an income-support approach. The latter could have given a cushion to consumption demand.

Latest investment numbers from the Centre for Monitoring Indian Economy (CMIE) do not inspire confidence on the capex or investment front. The value of new investment announcements was just 1.1 lakh crore in the quarter ended September 30, which is not just a sharp fall from 2.5 lakh crore in June 2021 quarter, but also a significant slump from the 2.6 lakh crore for the September 2020 quarter. The value of investment projects completed was 0.8 lakh crore, which is only marginally higher than 0.7 lakh crore in the June 2021 quarter. Fall in new private investment announcements is much larger than the headline number. The number went down from 2 lakh crore to 0.9 lakh crore between the June and September quarters.

The fact that private investment and investment announcements – the latter are a good indicator of business sentiment – are not picking up underlines the lack of momentum for economic growth.

Recovery in consumer sentiment is the most crucial factor

To be sure, one could argue that the third fiscal quarter (October-December) might turn out to be different. Not only is there likely to be increased festive demand, but India’s vaccination programme has also been doing well. As of 7pm on October 4, India fully vaccinated 27% of its adult population and another 44% of the population had received the first dose. It can be argued that neither a higher trade deficit nor sluggish capex numbers will pose a challenge for growth. Indian businesses have high levels of excess capacity and trade has not been a significant driver of economic growth in the recent past.

However, positive sentiment is essential for a festive, demand-driven growth story to materialise. This is where consumer confidence comes into play. The Reserve Bank of India’s Consumer Confidence Survey (CCS) shows that there was hardly any recovery in consumer sentiment between May and July. The September round CCS figures will be released on October 8, along with the Monetary Policy Committee resolution. However, the CMIE consumer sentiment index does not show a significant improvement even in September. If RBI’s CCS findings are in sync with that, there is good reason to be circumspect about any pleasant surprises on the economic front even in the December quarter.

 

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Tuesday, November 30, 2021