India’s economic record is drenched in red ink
Launched in October 2018, Mint’s macro tracker provides a monthly report on the state of the economy based on trends in 16 high-frequency indicators in four segments: consumer economy, production economy, foreign sector and ease of living. .
A year ago, during the first national lockdown, 13 out of 16 indicators had turned red, but this was followed by a gradual improvement, especially in the consumer and production economy segments, as the interlocks have eased. In March 2021, only seven indicators were in red, or below their five-year average trend.
In April, nine indicators on the tracker turned red, while three were in line with past trends. The ferocity of Wave 2, the growing brakes on dealing with it, and the sharp drop in the pace of vaccinations all contributed to the slowdown in economic momentum last month.
Unlike last April, lockdowns this time around have been region specific and less stringent, ensuring the economic blow hasn’t been as dire as last year. Nonetheless, the severity of the second wave and the uncertainty surrounding lockdowns have clouded the outlook for an economic recovery.
The second wave has now peaked, but “new sources of uncertainty” – such as indefinite lockout durations, low consumer sentiment among well-off Indians, and infections in rural India – mean that some of the economic costs could “survive the duration of local lockdowns,” a note from Pranjul Bhandari, Aayushi Chaudhary and Priya Mehrishi of HSBC Global Research said on May 13. Uncertainties could temper the rebound in July-September compared to the strong post-lockdown rebound in 2020, the note said.
The consumer economy segment has been particularly affected by the lockdowns induced by the pandemic. Tractor sales – a key indicator of rural demand that led to the recovery from the lockdown in 2020 – reached their weakest growth in six months. Passenger vehicle shipments have declined at an annualized rate of 4% from the same month two years ago. Shipments are usually a primary indicator and may not reflect sales in a given month. Vehicle registrations, which are more closely linked to retail sales, fell 17% – the much larger contraction showing the impact of lockouts on the end consumer.
Air travel has suffered despite being exempt from lockdowns, mainly due to widespread fear of the virus. The two-year decline was the largest in six months.
All two-year change numbers are based on the compound annual growth rate and use 2019 as the base year. The tracker now considers annualized growth over the past two years, as the unusual contraction of most high-frequency indicators last year makes year-over-year growth comparisons less useful now.
The producer economy segment recorded relatively better readings than the consumer segment. The Composite Purchasing Managers Index (PMI) was 55.4, similar to the March readings, and indicating a monthly expansion in economic activity. Robust export orders this time contributed to a rise in manufacturing activity and the overall index. Rail freight traffic has grown at an annualized rate of 5% from pre-pandemic levels, suggesting that supply-side disruptions have been less severe this time around.
Other indicators of the producer economy present a less optimistic picture. All eight basic infrastructure sectors saw their first drop in output this year, while non-food bank credit grew to its lowest level in years.
Producers who supply global markets have fared better than others, according to the data. With the world’s two largest economies, China and the United States, recovering rapidly, global trade has rebounded strongly in the past two months. India’s exports grew at a rate of 8% over two years, the fastest in almost two years. The push came from labor-intensive sectors, such as gemstones and jewelry, and leather products, which reversed losses to grow for the first time since October 2019.
Other labor market indicators – the rural wage rate and the labor force participation rate – suggest continued tension in the labor market. Unemployment, as measured by the Center for Monitoring Indian Economy, was on the rise in April, and if the trend continues, it could pose a question mark over consumer demand in the coming months.
Inflation could be another cause for concern, as it would erode the purchasing power of consumers while preventing the Reserve Bank of India (RBI) from maintaining an accommodative stance for a long time. Retail inflation, calculated over a two-year period, remained high in April at 5.7%. Of greater concern is the rise in core inflation, which excludes volatile items such as food and fuel. Some economists fear that rising wholesale prices will soon spill over into retail prices, hitting consumers hard.
Core inflation is expected to remain elevated in 2021, while food inflation is expected to âbehave largely wellâ despite rising world prices, thanks to a favorable monsoon and reduced supply side hitches, a indicated a May 13 memo to clients of ICICI Securities Primary Dealership.
Most analysts have downgraded their estimates of India’s economic growth, citing the impact of pandemic-induced lockdowns and slow vaccinations. At a time when several major economies are recovering rapidly, India’s economic record still looks grim.
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