State of India’s economy: what high frequency indicators say about it- recovery of the economy

How is the economy doing

We are well into the second half of this fiscal year, and around the same time last year, we heard a great deal about how the recovery would pick up during the time and how India’s growth would be back on its track in due time in all major respects. Well, looks like there still a lot to be said about how true those predictions have been, and how we have fared in different respects.

Even though the data for the gross domestic product of the first quarter of the fiscal year was revealed by the Ministry of Statistics and Programme Implementation a while ago, there’s no denial that it did not give a complete picture of different parameters of the economy, which, however, a few high frequency numbers and indexes would better depict.

While we know that the Nomura Index and Purchasing Manager’s index present hopeful pictures of the country’s situation, giving an optimistic boom to the Indian economy, it is also true that these indexes are more restricted to the formal sector in their depiction, and hence, may not dictate the overall story. Not only that, the increase in income inequality witnessed during and post the pandemic also inflate these indices, hindering them from truly depicting the actual state of affairs.

Let’s look at some other parameters and statistics that may help analyse the Indian economy’s current state of affairs and how growth has become a variable of a few parameters-

Exports leading the post- Covid growth story-

Opening up of the global economy and their stimulus-led demand played a significant role in the supply side recovery of the Indian economy, especially since domestic private consumption of India still remains on the low. As per the quarter numbers that were released, India’s exports of Rs 7.68 lakh crore not only exceeded the pre-pandemic export figures, but were also considerably one of the highest levels recorded in the country.

While these numbers were recorded despite the havoc that the second wave of the pandemic wreaked on the nation, and brought along optimism of export-led growth in the country’s economic performance, it is also imperative that we look at the import numbers to assess the true impact of foreign trade on the country’s domestic product prospects.

This inculcation, however, iterates a more important story. India’s trade deficit hit a record high of USD 22.9 billion back in the month of September, as a result of the sharp rise in imports and an increase in the OPEC led crude prices. India’s imports steeply jumped to a record USD 56.4 billion. Even though a rise in the crude oil prices have been one of the prominent reasons in the increase in the deficit, a stall being observed in the exports also consequently lead to the cause.

This means that even though domestic recovery has been more or less gradual, the increase in imports have been rather stark, not just in their prices but also in their volume.

As per Sonal Varma and Aurodeep Nandi, economist at Nomura Global Markets research, observe that this current account deficit is likely to continue primarily because of the reasons for this sudden increase in imports. This comes as an aftermath of lagged up oil import contracts or inventory restocking. But is this a common phenomenon, for the country to have these bunched up oil contracts that are this sharply widening the foreign trade deficit? Well, no, not particularly. But would we see it continuing? Looks like experts believe so.

Given the high oil and global commodity prices, the domestic upcycle has been dragging this pent up import expenditure, and the overhang on exports due to global supply bottlenecks widening the deficit gap. It is expected that in the next term, demand would be relatively softer.

If we go at this rate and pattern, however, the current account surplus of 0.9 per cent of the gross domestic product observed in the second quarter of 2021 would quickly diminish into an approximate 1.8 per cent deficit in the third quarter of the calendar year, July-September, especially looking at the record high numbers admitted in the month of September.

How about private investment?

Well, the last time we heard, we concluded that private investment would not be able to pick pace without private consumption supplementing it, and the latter didn’t really seem to have cooperated much during the last calendar year quarter.

But, has economic recovery helped aid the investment cycle to go up? The answer lies somewhere in the latest investment numbers given by the Centre for Monitoring Indian economy, and well, it doesn’t seem too optimistic to be fair.

As for the quarter ended September 30, the value of new investments was announced at Rs 1,1 lakh crore. This is terrible in two regards, year-on-year and quarter-on-quarter.

The September quarter of 2020 recorded an investment value of Rs 2.6 lakh crore, while the June 2021 quarter received Rs 2.5 lakh crore in investments. This is evident of a serious slump in the apex investment sector, and is clearly bad news for the economy, for it shows the spirit of India Inc. about the country’s future moving forward.

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.

These two, again, are representative of business sentiment in the near future, and as can be seen from these data, the hopes aren’t too high. It is ironic and to be honest, astonishing, especially since the country’s stock markets have been hitting record highs and Sensex creating historic records.

So, it looks like revival of consumption demand is still the key-

It is being talked about since the Union Government began to choose pro-capital approach for their fiscal policy, as opposed to the income-support approach, which however could’ve helped sustain private domestic consumption much like in other nations. The government, however, seems to be too overly optimistic about the self-revival of consumption demand, leaving the economy in this turmoil of tepid consumption.

Even though consumption demand has improved, the sentiment is still far below the pre-pandemic levels. To be sure, if private consumption wouldn’t pick pace by the right moment, it is seen that neither would private investment, so the momentum needs to be quick, and soon.  

With the approaching festive season, we expect that the said momentum would be observed, primarily because the pace of vaccination has been supposedly up to the required numbers. This means that India, whose growth has been primarily consumption-driven, would be able to get back on track despite all trade deficits and investment slowdowns if the consumption, majorly, gains momentum.

For that to truly happen, consumer sentiment would play a very important role. This is depicted using the Consumer Confidence Surveys conducted by the Reserve Bank of India, along with some conducted by the Centre for Monitoring Indian Economy’s Consumer Sentiment Index.

While the first one would be released on October 8, along with the RBI’s monetary policy review, the former shows that there has been no greater change in the people’s sentiment towards consumption, and that it continues to remain on the down low. If, however, the Reserve Bank’s data also stays consistent with the results of the Centre for Monitoring Indian Economy’s Consumer Sentiment Index, we would remain sceptical about the probability of the festive season doing much about changing the consumption trajectory of the country.