Number Theory: Which way forward for the Indian economy now?
The National Statistical Office (NSO) will release GDP numbers for the September quarter at the end of this month.
The National Statistical Office (NSO) will release GDP numbers for the September quarter at the end of this month. The Monetary Policy Committee (MPC) of RBI expects GDP growth to be 6.3% in the September quarter and 4.6% each in the remaining two quarters of the fiscal year. With the key festival of Diwali (and its tailwinds for consumption demand) now over, most independent experts expect economic momentum to slow a bit. That isn’t a given, though: an HT analysis of some high frequency indicators suggests that there are both upsides and downsides to the economy’s prospects at the moment. Here are four charts that explain this.
Core sector activity in the second quarter has been robust
Ministry of industry and commerce released the data for index of eight core sector industries – it includes coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity – for the month of September earlier this week. On an annual basis, growth rate increased to 7.9% in September after having fallen to 4.1% in August. When seen on a sequential basis, the index has fallen continuously in August (139.7) and September (138.1) from its July (140.7) value. However, a slightly long-term comparison of the absolute value of the index shows that the V-shaped recovery in the core sector index after the pandemic’s disruption in 2020 has continued well into this year.
There is a progressive turnaround in tax collections after a long time
The Controller General of Accounts (CGA), which works under the finance ministry, has now released the central government’s fiscal numbers till September, which is the first half of the fiscal year. The numbers suggest that there has finally been a progressive turnaround in the tax burden as the share of direct taxes in the government’s gross tax revenue (GTR) has crossed 50% in the first half of the fiscal year for the first time since 2015. While the share of direct taxes in GTR has been higher in the past, it has fallen over the past seven years. Because direct taxes – they include income tax and corporation tax – exclude the low-income groups and tax the rich at an increasing rate in proportion to their incomes, they are progressive in nature unlike indirect taxes, which tax the rich and the poor at the same rate.
However, economic momentum may slow going forward
Given that an important part of the festive season is now over, will demand, especially the consumer component of it, slow going forward? While many independent analysts have been supporting this argument, its empirical validation or lack of it will have to wait for economic data for the ongoing quarter and the next. With this caveat in place, capex data can give some idea into the expectations of future demand for private capital. Because investment spending, by definition, is undertaken to cater to future demand, it is a good leading indicator of what business thinks about future demand in the economy. An October 10 research note by HSBC chief India economist Pranjul Bhandari discussed this issue in some detail. “There is evidence that the replacement capex needs of the economy has picked up…It is worth reiterating here that replacement capex after all is just that. Some short run spending to make sure that the supply capacity of the economy does not diminish over time. By itself, it does not add to supply expansion. For the latter to revive, we need to look elsewhere.”
Another reversal in the commodity price cycle might add to problems
Prices were becoming softer, but that’s no longer the case. The trend in India’s crude oil basket (COB) price seem to suggest this. Monthly average price of India’s COB fell continuously from $116 per barrel in June to 90.7 in September. This was good news for the Indian economy, which imports more than 80% of its energy requirements, and has been dealing with a high inflation environment. However, this trajectory seems to have stalled, if not reversed definitively, in the month of October with average COB price climbing once again to $91.7 (it increased to $92.25 on November 1). Whether or not the trend of stalling/reversal of easing energy prices continues could have a large impact on both the inflation situation as well as fiscal arithmetic. Both of these have the potential of affecting the economy’s growth trajectory in the near future.
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