Number theory: The state of the Indian economy, in four charts

That the Indian economy is doing better than the rest of the world is beyond doubt.

That the Indian economy is doing better than the rest of the world is beyond doubt. Advanced economies are dealing with recession fears. China, once world’s fastest-growing economy, will grow at much lower rates, if institutional forecasts are to be believed. This relative edge notwithstanding, what is the state of the Indian economy? This question is a salient one because GDP growth for the quarter ending June came in significantly lower than what the Monetary Policy Committee (MPC) of RBI projected in its August resolution. MPC, in its latest resolution dated September 30, expects the economy to grow at a faster pace in the remaining three quarters of the current fiscal than its August projections. Is this confidence warranted? Here are four charts which try and answer this question.

The state of the Indian economy, in four charts (Pradeep Gaur/Mint)

Some formal sector manufacturing indicators are showing dynamism...

The Purchasing Manager’s Index (PMI) manufacturing is the first such. It has stayed above the critical threshold of 50 – this signifies expansion in economic activity over last month – for the 15th consecutive month in September. To be sure, PMI manufacturing has seen a moderation in August and September, but at 55.1, the September value is still higher than its historic average. The dynamism in PMI numbers, when read with reports of a sharp revival in car sales in September, suggests that some segments of the economy are indeed doing well.

... but other industrial indicators seem to suggest a loss in growth momentum

The index of eight core sector industries is the biggest example here. This index tracks production of coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity, and is a good indicator of commercial activity as well as capex demand. The latest available value for this index is for August and it shows a deceleration in momentum both in terms of absolute index value and growth rate.

This is concerning, given the deceleration in new investment announcements

The Centre for Monitoring Indian Economy (CMIE) database gives information on new project announcements every quarter. To be sure, these numbers are more a reflection of business sentiment than actual investment activity. However, they do give an idea about how businesses perceive of the state of the economy. New investment announcements (in terms of cost of projects) fell in both the June and September quarter after having shown a recovery in the quarter ending March . A breakup of the announcements by ownership shows that the pattern holds for private investments also. When read with the fact that capacity utilisation levels – RBI’s Order Book, Inventories and Capacity Utilisation Survey (OBICUS) tracks this – actually fell in the quarter ending June (latest available data) after rising for three consecutive quarters raises a question whether business has started pulling back on new investment plans. To be sure, rise in borrowing costs due to rising interest rates (both in domestic and global markets) could also have played a role in this trend. It can also be argued that capacity utilisation has a seasonal element and therefore a more appropriate comparison is to look at changes on an annual and not quarterly basis. While the June number is higher than the June 2021 and 2020 levels, it is still lower than the pre-pandemic value of June 2019.

The biggest question: When will consumer confidence turn positive

That the Indian economy will not suffer significantly because of an imminent global recession is partly a reflection of the fact that exports do not matter a lot as far as India’s GDP growth is concerned. Some export-driven growth headwinds are likely to be neutralised from the relief in import prices as global commodity prices have come down. This also means that domestic demand is the most important factor as far as growth prospects of the Indian economy are concerned. It is on this front that the results of the latest Consumer Confidence Survey (CCS) – it is conducted in 13 major cities – continue to disappoint. While the CCS results show an improving trajectory, the overall scenario continues to be bleak. The net current perception – it measures the difference between share of respondents who reported an improvement and worsening compared to a year ago – on general economic situation was negative for the 20th consecutive round in the September CCS numbers. This means that more people continue to report a worsening in economic conditions than those who think there has been an improvement. If one were to exclude an occasional positive blip in the March and May 2019 rounds, net current perception on general economic situation has been negative for all rounds since March 2018. While the survey does show a sequential improvement, consumer confidence continues to lower than pre-pandemic values. One could argue that unless there is a discernible improvement in consumer confidence, sustained recovery in business confidence will continue to elude the economy. Given the fact that global economic environment has turned pessimistic, the question is will consumer confidence experience a significant revival without a fiscal stimulus.