Most institutional and private forecasts expect the Indian economy to contract at a double-digit rate in the current fiscal year. This, despite the fact that the economy has been showing a sequential (month on month) improvement compared to the situation when it was locked down. However, some high frequency economic indicators suggest that not only is the economy showing sequential improvement, it might actually have surpassed last year’s levels, albeit in some areas. Does this mean that India’s economic performance will end up being better than projected?
Finance minister Nirmala Sitharaman hinted as much when she said last week that India’s economic growth could be negative or near-zero this year. A holistic reading of the statistics and expert opinion seem to suggest that one should wait for the ongoing festive season to end before reaching any conclusions on the economy’s growth prospects for the full year.
1. October surprises pleasantly
At least three economic indicators for the month of October suggest that economic activity received a big boost last month. Goods and Services Tax collections crossed the psychological ?1 lakh crore mark for the first time since the imposition of a nationwide lockdown in the month of March. Purchasing Managers’ Index (PMI) for manufacturing reached its highest ever value of 58.9 in October. This is the third consecutive month when PMI manufacturing has shown a sequential improvement and stayed above 50. A PMI greater than 50 signifies coming expansion in economic activity. PMI services for October will be released over the next few days. It reached a value of 49.8 in September. October could be the first month after the lockdown when both PMI manufacturing and services are in the expansion zone. The Nomura India Business Resumption Index (Nibri) increased to 84.4 for the week ending November 1, the highest value since the imposition of the lockdown; 100 indicates pre-pandemic levels of activity
2. Does a high PMI necessarily translate into high manufacturing growth?
To be sure, PMI numbers do not capture economic activity in the entire economy and are based on responses of a few economic units. Whether or not there is a revival in manufacturing will be known only after the Gross Value Added (GVA) in manufacturing numbers are released. The September quarter numbers will be released by the end of November. How useful is PMI manufacturing in predicting movements in GVA manufacturing? An HT analysis of data since the quarter ending September 2013 (the earliest period for which data is available at the Centre for Monitoring Indian Economy database) shows that PMI being in the expansion zone does not guarantee a high growth rate in GVA manufacturing.
If one were to exclude the June 2020 quarter, GVA manufacturing contracted in four quarters during this period: June 2017 and three consecutive quarters from September 2019 to March 2020. In each of these quarters, the average value of PMI manufacturing was greater than 50. On the other hand, even though PMI manufacturing was less than 50 in the quarter ending September 2013, manufacturing grew at 3.65%. This fact underlines the need for caution in taking a manufacturing revival for granted because of a buoyancy in PMI numbers
3. Is the government generating economic headwinds instead of tailwinds?
That the central government’s fiscal response to the pandemic’s economic shock has been inadequate in terms of direct fiscal stimuli is accepted by most observers. To be sure, the fiscal year is still not over, and the finance minister in an interview to HT said that she is open to the possibility of a second stimulus to the economy. Central government accounts until September, the latest period for which data is available with the finance ministry, suggest that the government is cutting back on fiscal support rather than enhancing it. Total spending by the central government in the months of August and September was lower than it was in the corresponding period last year. The shortfall in capital expenditure, which is more critical in generating long-term growth, is bigger.
Experts are sceptical about a second fiscal stimulus. A research note issued on November 2, by Samiran Chakraborty, chief economist at Citigroup Global Marekts India Pvt Ltd, said: “There is some market expectation that as the economy has opened up more now, the government would be in a position to announce another round of stimulus. We have been mostly of the view that the government has a conservative fiscal stance and was not building in large fiscal stimulus in our forecasts. With the February 2021 budget making process starting in November, the focus of any further fiscal action could be deferred to the February budget. We are now biased towards any fiscal action to favour infra spending rather than of the populist/redistributive variety. In our view, the govt needs to first spend the budgeted amount.”
4. What about demand?
The only long-term driver of sustained economic growth is demand. It is on this front that uncertainty remains. October and November could see a one-time boost in spending because of the festive demand. A good kharif harvest, which is already underway in most parts of the country, could signal a sustained rural boost to demand in the economy. But there is also the question of the employment generation ability of the ongoing sequential recovery.
For example, the press release issued by IHS Markit, the agency which conducts the PMI survey, says that even though the PMI value has been increasing, October was the seventh consecutive month of fall in employment numbers. A fall in employment also means falling incomes and therefore demand, which could jeopardise future growth. The December round of RBI’s Consumer Confidence Survey, which includes indicators on both essential and non-essential consumer spending, will offer a crucial insight on what is happening to consumer demand in the economy.