September , 2021
Improving macro indicators suggest India’s growth revival
18:06 pm

Tushar K. Mahanti

A number of recent reports on the Indian economy have painted contradictory pictures of India’s future growth prospects. The International Monetary Fund (IMF) has cut its GDP growth forecast for India to 9.5% for the current fiscal from as high as 12.5% projected earlier - following the disastrous impact of the second wave of Covid-19. 

IMF joins a number of global and domestic agencies which have all cut India's growth estimates for the current fiscal. S&P Global Ratings projected a 9.5 % GDP growth in the current fiscal and 7.8 % in 2022-23. While the World Bank has cut India’s economic growth forecast to 8.3 % in the 2022 fiscal from 11.2% earlier, the Asian Development Bank (ADB) has downgraded the growth projection to 10 % from 11 % estimated last April.

At the other end, two reports — the latest Reserve Bank of India (RBI) monetary policy statement and the Union finance ministry’s economic review for July 2021 — have sounded cheerful and optimistic while softening the negative influences on the economy. With the second wave of Covid-19 pandemic abating and state governments relaxing restrictions, the economy has been showing signs of rejuvenation since the second half of May, the finance ministry has said. The ministry added that following improvement in economic activities the bank credit growth showed encouraging trends with non-food credit growth crossing the 6.5%-mark in the fortnight ended July 16 after remaining muted for nine fortnights.

The RBI in its August Monetary Policy Statement has in fact, appeared more optimistic about India’s current growth prospects. Domestic economic activity has begun to recover with the ebbing of the second wave, the central bank argued. Looking ahead, the report said that agricultural production and rural demand are expected to remain resilient. Urban demand too is likely to gather momentum as the manufacturing sector has started recovering. The release of pent-up demand too is expected to acquire a durable character with an accelerated pace of vaccination.

Rising exports, the pick-up in government expenditure, including capital expenditure, and the recent economic package announced by the government will provide further impetus to aggregate demand. Although investment demand is still anaemic, improving capacity utilisation and congenial monetary and financial conditions are preparing the ground for a long-awaited revival. “Taking all these factors into consideration, projection for real GDP growth is retained at 9.5% in 2021-22 consisting of 21.4% in Q1; 7.3% in Q2; 6.3% in Q3; and 6.1% cent in Q4 of 2021-22. Real GDP growth for Q1 of 2022-23 is projected at 17.2%,” the report said.

But if one concentrates on the present scenario rather than future prospects one would clearly find that the Indian economy is indeed turning towards a recovery after facing muted economic activities following the second wave of Covid-19 early this year. Improving business sentiments, coupled with a strong recovery among industrial nations, propelled the recovery trail. While substantial spending by the government provided the biggest boost to growth, private investments and higher exports – in segments such as engineering goods, chemical products, and pharmaceutical – are helping the country’s recovery momentum.

India’s manufacturing activity posted the strongest growth in three months in July 2021 with states easing pandemic induced localised restrictions. According to the data analytics firm IHS Markit the purchasing managers’ index (PMI) for the manufacturing sector rose to 55.3 in July from 48.1 in June. A level above 50 is considered expansion while anything below 50 is considered contraction in economic activity.

Factory output, measured by Index of Industrial Production (IIP), has been growing sharply since April 2021 due to a favourable base effect as industrial activity came to a virtual halt a year ago following the nationwide lockdown. The cumulative growth during April-June (2021-22) was 45%, compared to a contraction of 35.6% during the same period a year ago. Manufacturing output grew by 53.7% during April-June 2021 as against a contraction of 40.2% during the same period last year. Admittedly, the high growth this time was calculated on a low base of last year, but the fact remains that the manufacturing output is growing, leaving behind the agony of contraction.

Reflecting the upswing in manufacturing production, the GST collections have increased steadily during the period. GST collections which nose-dived to Rs.32,294 crore in April 2020 have increased to a record Rs.1,41,384 crore in April 2021. The cumulative GST collections in the first four months of the current fiscal – during April-July 2021 – have increased by 66% from Rs.2,74,662 crore in the same period last year to Rs.4,55,356 crore now.

The high growth of the manufacturing sector was supported by a better performance of the core sector. Higher growth apart, the 8.9% growth in India’s core sector output in June 2021 suggests two important things as far as economic activity is concerned. For one, the halving of output growth in this segment from the 16.3% growth India had seen in May this year shows that the low-base effect is weaning away and the actual growth numbers will start getting reflected in macro-economic data. Second, as the economy continues to open up, several key sectors are seeing an uptick as demand for electricity, crude oil, cement and steel show an increase.

On a sequential basis, the core sector output registered a marginal growth of 1.1% in June 2021 compared with May, which shows that the economy is probably showing some initial signs of recovery, say experts. E-way bill generation and exports gained momentum in June. Automobile production also ramped up and power and fuel demand picked up owing to increased mobility.

With the rising demand from the realty sector and automobile industry the production of steel, which declined to a paltry 3.1 million tonnes (MT) in April 2000 when the industrial activities came to a complete standstill following lockdown, has picked up thereafter. The steel production increased to 8.3 million tonnes in April 2021.

During the first three months of the current fiscal India’s aggregate steel production increased by over 70% from 15.8 million tonnes during April-June 2021 to 26.9 million tonnes now. The combined crude steel production of JSW Steel was 5.07 million tonnes registering a 65% year on year jump in Q1 FY22 from 3.07 million tonnes posted in Q1 FY21. Tata Steel’s production was up by 55% year-on-year during the first quarter of FY 22 to 4.62 million tonnes as against 2.99 million tonnes reported during the same quarter last year.

Maybe, the real estate sector is still struggling to gain its past buoyancy but the second quarter of 2021 has seen a definite improvement. India’s top seven cities saw an 83% rise in sales of residential houses in the April-June 2021 quarter from the year-ago period showing resilience in the market and a limited impact of the second coronavirus wave, a recent report entitled ‘Residential Market Update – Q2 2021’ by real estate firm JLL has said.

Surprisingly, Mumbai and Pune, which suffered the most during the second wave of Covid-19, accounted for 42% of the total sales of residential units in the first six months of 2021. And if the new launches in these seven cities in the June quarter declined by 20% Q-o-Q as several developers deferred new launches and focused on completing projects and inventory, still total launches were almost double that of the year-ago period.

Likewise, the automobile industry too has seen a recovery trail in the first quarter of the current year. According to the latest data by the industry body, Society of Indian Automobile Manufacturers (SIAM), the first quarter of the current fiscal (April-June 2021) witnessed 113% growth in total domestic sales to 3,180,039 units as against 1,492,612 units in Q1 FY 2020-21.

In a reflection of revival of economic activity in the country, India’s peak electricity demand recorded an all-time high of 200.57 gigawatts (GW) on 7 July, 2021 according to the Union power ministry statement. The good performance of the manufacturing sector, back home, was supported by a surge in exports. The cumulative value of exports for the period April-July 2021 was Rs.9,67,579.13 crore as against Rs.5,66,322.06 crore during the period April-July 2020, registering a growth of 71%. As compared to April-July 2019, exports in April-July 2021 grew by 30.2%. The cumulative imports during April-July 2021 grew by 90% over the same period last year suggesting an increase in demand for industrial raw materials and intermediaries following buoyancy in industrial activities.

Improvement in consumer sentiments is visible in the sharp rise in automobile sales as well. According to the Society of Indian Automobile Manufacturers (SIAM), the first quarter of the current fiscal (April-June 2021) witnessed 113% growth in total domestic automobile sales to 3,180,039 units as against 1,492,612 units in Q1 FY21. For record, the industry sold 6,084,478 units in the same quarter of 2019-2020. That is, automobile sales in Q1 this year was far less than that of the same quarter two years ago. Granted, but then a more than 100% rise is good enough to show that the industry is reviving back its growth trajectory.

What is surprising is that amid severe disruptions in economic activities that led to production cuts across sectors, India Inc has sharply expanded its income and margins. The cumulative net profit of 3,356 listed companies reached a record Rs.1.68 lakh crore in Q1 F122— up by nearly five and a half times on year-on-year (YoY) basis. The surprise upside on earnings came despite a continued contraction in sales volumes and revenues. The combined net sales of these companies increased by 48.3% in Q1 FY22 compared to the same quarter last year.

The spectacular performance of India’s corporate sector probably explains the amazing buoyancy of India’s stock market. Reflecting the trend, the 30-share S&P BSE Sensex has gone on increasing uninterrupted since the beginning of 2021. The average monthly closing Sensex gas increased by over 9,000 points from 46,286 in January 2021 to 55,329 in August. Among other things, a buoyant stock market indicates investors’ faith in India Inc.

In addition to the industrial and the service sector, the agricultural sector too is expected to contribute handsomely to India’s current turnaround bid. The agriculture sector which had saved GDP to fall further in the last two years is projected to do well this year as well. With rainfall intensifying in August after some deficit in July, India is likely to harvest a record kharif crop if the rest of the monsoon season goes well. Till August 7, the overall area under kharif crops was 10% higher year-on-year, driven by factors such as early onset of monsoon, reverse migration of labour and higher minimum support price for some crops. Good temporal and spatial distribution of rainfall aided crop growth.

However, not everything is hunky dory. The rising inflation rate is feared to prove a roadblock to India’s recovery trail. The headline CPI inflation at 5.59% in July 2021, though below the upper tolerance band of 6%, masks the very high inflation in certain key categories that are considered volatile. Within the food and beverages category, items that have shown extremely high inflation include oil and fats (32.53%), eggs (20.82%), pulses (9.04%), meat and fish (8.33%), and non-alcoholic beverages (14.44%). With oils and fats and pulses making up the consumption basket of the common man, such inflation is bound to be iniquitous in its consumption impact across income groups.

The inflation on account of fuel and light at 12.38% and that on account of transport and communication at 10.54% are also much higher than the average CPI. Most of the developmental agencies including IMF, World Bank, ADB and SBI have recently slashed India’s 2021-22 GDP growth projections. They have their own reasons but the recent uptick in India’s macro fundamentals suggests a better economic performance this year. 


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