India’s Economic Slump: Is There An Upturn In High-Frequency Indicators?

Growth fell to 5 percent in the first quarter of the current financial year and to 4.5 percent in the second quarter. For the full financial year, growth is seen at 5 percent, which means the third and fourth quarters must show at least marginal improvement in momentum.

Has that happened?

For the months of October and November, indicators such as the purchasing managers’ index, along with automobile sales and petrol and diesel offtake have shown marginal improvement. However, other indicators like bank credit and imports have shown little or no pick-up.

It’s hard to say if there is a pick-up but we are close to bottoming out, said DK Joshi, chief economist at Crisil. “While the state of the economy is still something to worry about, it appears that we are closer to bottoming out as the pace of deceleration has reduced and the possibilities of a sharp downturn from this point are few,” Joshi said.

The Indian economy will stabilise before it recovers, said Sameer Narang, chief economist at Bank of Baroda. The current quarter is likely to be characterised by conflicting signals but could represent a phase of bottoming-out, Narang said.

Industrial Production

The index of industrial production contracted for the second consecutive month in October, declining by 3.8 percent. However, the pace of contraction wasn’t as sharp as the 4.8 percent decline seen in September.

Manufacturing output, which has been falling since July this year, fell by a lesser 2.1 percent in October, after contracting 3.9 percent in September. In contrast, electricity output fell sharply by 12.2 percent in October compared to 2.6 percent in September.

There was a jump in intermediate goods output, which typically signals improved output of final goods down the line. However, according to Saugato Bhattacharya, chief economist at Axis Bank, two items—fragrances and oil essentials—contributed to most of this growth. Both are used in the production of certain fast-moving consumer goods but the sharp jump in these categories appears to be an anomaly, he said.

Automobile Sales

Last year, sales of automobiles were among the first high-frequency indicators to tell the story of a weakening economy. Sales contracted 12.1 percent in November on an annual basis, according to data from the Society of Automobile Manufacturers, which reports data of wholesale dispatches. The extent of contraction eased.

Simultaneously, retail automobile sales, measured by vehicle registrations, clocked a 2 percent year-on-year growth in November, according to data released by the Federation of Automobile Dealers Associations. These sales remained positive for the second straight month.

Fuel Consumption

Diesel consumption rebounded and increased by 8.8 percent, after having fallen over the past three months. Consumption of petrol rose by 9.2 percent, the highest since July 2019.

To be sure, petrol consumption has been among the indicators that has been relatively steady despite broad-based weakening of the economy. Diesel consumption has been volatile, reflecting its industrial usage.

Purchasing Managers’ Index

The Purchasing Managers’ Index showed an improvement in November, across both services and manufacturing.

The composite PMI rose to 52.7 in November, the highest in the current financial year. It also moved back into expansion zone above the 50-mark after two months. While the services PMI rose to 52.7, after falling below 50 in the previous two months, the manufacturing PMI rose to 51.2 in November from 50.6 in October.

The marginal improvement reflected a stabilisation in the real sector, Barclays said, in a research note dated Dec. 2.

Bank Credit

Non-food credit disbursed by banks continued to grow in single digits despite attempts by the government to push banks into lending more. Bank credit grew 8.3 percent in October, compared to 8.1 percent in the previous month.

While credit to micro and small industries continued to contract, credit to large industries grew by 4.2 percent in October compared to 3.8 percent last year. Personal loans also held up, growing by 17.2 percent. At 26.8 percent, credit growth to NBFCs remained lower than last year.

While bigger industries are still not keen on borrowing, retail borrowings have remained a positive, Narang said. Some of the momentum in retail borrowings reflects purchase of loan portfolios through securitisation, Crisil pointed out in a research note last week.

Core Inflation

Core inflation saw a marginal rise to 3.5 percent in November compared to 3.44 percent in the previous month. Core inflation, which excludes the impact of volatile food and fuel prices, is considered an indicator of demand conditions in the economy. At current level, core inflation is low and reflects limited pricing power in the face of weak demand.

Headline inflation, however, soared due to higher prices of vegetables. That increase in prices is largely driven by supply disruptions rather than demand conditions.

Logistics

Trends emerging from the logistics segment remained mixed.

Rail freight, which has been declining since the beginning of the current financial year, contracted by 8.2 percent in October compared to a 6.7 percent fall in September.

Air passenger traffic rose by 3.9 percent, the highest in the current financial year. However, it remained significantly lower from a growth of 19.2 percent in the same month last year.

Foreign Trade

The fineprint of foreign trade data continued to suggest a weak domestic economy.

Total imports declined by 12.7 percent in November after contracting by 16.3 percent in October. Non-oil imports were down 10.3 percent.

Exports contracted by under 1 percent in November, turning in a marginally improved performance compared to previous months.

Is There Stability?

Economists are reluctant to call a bottom to the economy just yet but say that some aspects of the data are encourgaing.

Narang said he expects the rural economy, which has been a pain point, to improve. Along with a cyclical upturn in food prices globally, wholesale and retail food prices are rising, reservoir levels are good and farmers should benefit, said Narang.

A research note by Motilal Oswal dated Dec. 12 suggested that October was the worst month in the current cycle while November appears to have seen some improvement. Still, predicting real GDP growth above 4.5 percent in Q3FY20 is difficult as of now, it said.

Joshi said that a reversal is harder to identify because data remains noisy. Some of this is because of the base effect, Diwali falling in different months in the last two years and risks that are coming from varied quarters. The tyranny of averages further makes it harder to discern a reversal, he added. An aggregate indicator smoothens out volatility which we see in individual components of the indicator, he explained.

In its last meeting, the Monetary Policy Committee was of the view that economic activity has weakened further and the output gap remains negative.

However, several measures already initiated by the government and the monetary easing undertaken by the Reserve Bank since February 2019 are gradually expected to help in stabilising the real economy, it stated.