From the record June Quarter lows to real GDP projections for Q3 quarter and onwards, it may appear that we have come some way, we are still quite far from any reasonable recovery
India’s Economic Indicators have been encouraging, with the stock market booming over the last 6 months. Are these signs of recovery and have we left behind the worst, already? There is no doubt that the last few month have augured well for the economy and many indicators are now showing a positive trend. To add to this, the markets have been doing excellently, despite a mayhem around the March-April months when the pandemic started. But India’s recovery is still a long way and one should not get swayed by the recent indicators and the markets’ uptrends.
On 4 December when the Reserve Bank of India (RBI) Governor Shaktikanta Das announced the bimonthly monetary policy, stock markets went up like a rocket, attaining their lifetime highs. The market rally has continued unabated till date. The trigger at that time was an upward revision of the Gross Domestic Product (GDP) growth projection from an earlier (-) 9.5 per cent to (-) 7.5 for the financial year 2020-21 (April-March). A two per cent upward revision for FY21 acted as a catalyst for the markets.
If the estimates, hold correct, this would be termed as a strong rebound from what was being seen as dark tunnel ahead of us. So, from phases of de-growth, the December quarter is expected to report some growth followed by more growth during the March quarter.
Meanwhile, just a few days back, the government in its first advance estimates of the GDP growth for FY21 has revised the contraction of real GDP to 7.7 per cent, which is 0.2 per cent higher than the RBI estimates.
These are very mixed signals considering a new wave of the pandemic now taking over with a more deadly mutant virus in the picture now, amid improving Goods and Service Tax (GST) collections, higher automobile sales that includes robust tractor sales and a positive manufacturing and services Purchasing Managers Index (PMI).
Positive Signals
The stock markets in India and globally have been going from strength-to-strength riding on excess liquidity in the system. This is despite the economies suffering from de-growth or lack of adequate growth. Markets have even discounted all the negative commentary around the road ahead.
The GST collections at Rs 1.15 trillion have been the highest ever since the implementation in 2017. This is the third instance when the collections have crossed the Rs 1 lakh cr mark in a row. The government collect Rs 1.04 lakh cr in November 2020, which was up by 1.4 per cent from the collection in November 2019.
Another important indicator is the manufacturing Purchasing Managers Index (PMI) that remained stable. The PMI put up by IHS Markit stood at 56.4 in December compared with 56.3 in November. A figure above 50 indicates expansion while below it, signals contraction. This is an optimistic sign for the economy even though the headline number was down from 58.9. The recent months’ data suggest that the aggregate orders are going up as lockdown restrictions are easing out. The recent sharp and strong upturn during this period has not been seen in eight years prior to September.
As for the automobile industry, things have also shown upward trends as most vehicle manufacturers ended 2020 on a positive note, registering good wholesales growth. India’s largest passenger car Maruti Suzuki India registered a robust growth of over 14.6 per cent year-on-year (YoY). Tata Motors and Mahindra and Mahindra also delivered positive results. The auto sales in November were up by over 8.7 per cent year on year while the month-on-month growth was down by over 14 per cent.
Headwinds and outlook
What does these numbers suggest? Has the recovery begun and are these numbers there to stay? Also, if there is any link between the markets and the current state of economy?
The answer to these questions are not simple and it will be treading a dangerous line if one gets swayed by the current stock market boom and the economic indicators that have emerged a last 2-3 months.
It will be incorrect to assume that the current market boom is because of some robust growth being witnessed by the economy or even its likelihood in the near term. There is a disconnect between the stock markets and the economy. The markets have been booming because of the presence of ample liquidity. The Indian stock markets have also been taking cues from the global bourses which are flushed with liquidity. There is a situation of overbuying and we may see some sharp corrections, going forward.
As for the indicators, the last 2-3 months have been particularly good for the economy. The economy has moved only upwards from the June quarter debacle. But, one must realise that the June GDP contraction has been phenomenally high and to go to that level when the economy is opening is unlikely.
The services economy is a glaring example. The service sector growth fell for the second time in a row in December. It fell to 52.3 in December from 53.7 in November and 54.1 in October. While there has been an upturn in new work, supporting business activity growth and the first rise in employment for nine months, spike in costs and Covid-19 cases along with latest travel bans have been major spoilsport.
The input costs also increased to the highest level since February as per the IHS Markit report. Inflationary pressures will not only slowdown economic growth but also curtail RBI form executing further rate cuts.
Also, it is still not known if the for auto sales will sustain or a cooling effect will set in after the festive season. One should also note that the pre-covid sales situation was very discouraging for the industry, so whatever increase we are seeing now is on a low base.
According to the RBI estimates, the real GDP growth for the Q3 quarter is expected to be at 0.1 per
cent and 0.7 for the Q4 quarter. The GDP contraction in the June quarter was at 23.9 per cent while it was 7.3 per cent in the September quarter.
Reality Check
One must be happy to see a growth from Q3 quarter but cannot rejoice at this growth. The road from here is arduous. The country’s GDP fell below 5 per cent over three quarters in a row, much before the pandemic began.
There are some who are calling the upward trend in the economic activities as green shoots while, others attributing this exuberance to festivities. In the former case, the Government, RBI, economists and people from the industry have been gung-ho about the prospects.
Many experts have said that the record October and November numbers have been on the back of festivity, which may not hold on in the following months.
Both, the government and the RBI need to do much more. There should be more public spending as has been suggested for a long time now and not just steps to provide loans or credits. People need cash in hand, which the government needs to provide.
The countdown for the Budget 2021 has begun and the expectations from the industry and common man are many. It will be interesting to see what comes out of it.
But, if these aforementioned indicators hold ground, and the numbers cited by RBI are close to being accurate, the path to even reasonable growth will still be a long shot.