India’s economic record is dipped 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 comfort of living. .

A year ago, during the first nationwide lockdown, 13 out of 16 indicators had turned red, but this was followed by a gradual improvement, especially in consumer and producer segments of the economy, as the interlocks were relaxed. 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 the second wave, the increasing restrictions 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, the closures this time have been region specific and less stringent, ensuring that the economic blow has not been as dire as it was last year. Nonetheless, the severity of the second wave and the uncertainty surrounding the closures have clouded the outlook for an economic recovery.

The second wave has now reached its peak, 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,” said a May 13 note from Pranjul Bhandari, Aayushi Chaudhary and Priya Mehrishi of HSBC Global Research. Uncertainties could temper the July-September rebound from the strong post-containment rebound in 2020, according to the note.

Consumption shot

The consumer economy segment has been particularly affected by the closures induced by the pandemic. Tractor sales, a key indicator of rural demand that led to the recovery from the lockdown in 2020, reached their slowest 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 tied to retail sales, fell 17%, the much sharper contraction showing the impact of blockages on the end consumer.

Air travel has suffered despite being exempt from the 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) score was 55.4, similar to the readings for March, and indicating a monthly expansion in economic activity. Strong export orders this time contributed to the 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 output decline for the first time this year, while non-food bank credit grew to its lowest level in years.

Constraint points

Producers serving global markets have fared better than others, the data shows. With the rapid recovery of the world’s two largest economies, China and the United States, global trade has rebounded sharply 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 market participation rate — suggest continued strain on the labor market. Unemployment, as measured by the Center for Monitoring Indian Economy, was on the rise in April, and if the trend continues, that 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 making it difficult for the Reserve Bank of India (RBI) to maintain an accommodative stance for long. 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 the rise in wholesale prices will soon spill over into retail prices, hitting consumers hard.

Core inflation is expected to remain high in 2021, while food inflation is expected to be “largely well behaved” despite rising world prices, thanks to a favorable monsoon and easing supply side issues, indicates a May 13 memo to clients of ICICI Securities Primary Dealership. .

Most analysts have lowered 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 rapidly recovering, India’s economic record still looks grim.

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