At a time when multiple high-frequency indicators are pointing to an uptick in the economy, the Finance Ministry is viewing the stubbornly high inflation trend — especially the continuing gap between prices of food products at the wholesale and retail levels — as being driven largely by logistical gaps. Economic Affairs Secretary Tarun Bajaj said the government expects high price levels to cool down with the arrivals of the new crop, adding that another round of stimulus measures is likely to be unveiled shortly.
“I think this (high inflation) should be temporary in our view, for two reasons — one, there is actually a difference between the WPI and the CPI. So, that itself shows that this should be something to do with logistics and with the good agricultural season that is coming and the new crop is with us, we are hoping that this should cool down … We think it is a temporary affair and should be back to normal very soon and also limited to few commodities,” Bajaj said.
While inflation has been a continuing concern, other indicators are looking up. After a strong September that saw key consumption-oriented indicators such as electricity demand, freight traffic, toll collections and petrol demand among others surpass their pre-Covid February levels, October saw further improvement in the recovery on various fronts. Positive data flow on GST collections, automobile sales, PMI manufacturing for October came as a reassurance for the markets too.
“Hopefully the economy should be back on rails and it is moving much faster than what had been anticipated by a lot of experts and economists,” Bajaj said.
However, there are some roadblocks: One critical concern being the weak employment number. CMIE data shows that India’s unemployment rate in October rose to 6.98 per cent from 6.67 per cent in September. Also, with a fresh wave of Covid cases in large parts of Europe and imposition of lockdown measures across a number of countries, there is a growing concern over the sustainability of the economic recovery, as rising cases in India and lockdown imposition may just derail the entire progress. This seems to be partly reflective in India’s exports numbers in October, which fell 5.4 per cent to $24.82 billion, compared to $26.23 billion in October 2019, according to government data. Exports during April-October 2020-21 were at $150.07 billion, down 19.05 per cent over the same period last year. More reflective of the stress in domestic demand is the 11.56 per cent fall in imports in October, which declined to $33.6 billion, compared to $37.99 billion in October 2019. Several key sectors such as tourism, airlines and hospitality, among others, also continue to reel under pressure.
The concerns notwithstanding, October witnessed new additions to the positive data flow seen in September. If petrol sales had already crossed their pre-Covid levels in September, diesel sales, which were still down, witnessed growth for the first time in October since the lockdown was imposed in March. Besides, the Purchasing Managers’ Index (PMI), an indicator of the manufacturing activity, expanded at its fastest pace in over a decade in October.
Sustaining demand key
Many high-frequency indicators are showing an uptick in the economy. The real test of the economic recovery, however, would be dependent on several factors including sustenance of the demand beyond the festive season and good health of the banking sector.
The automobile sector, which has been witnessing a month-on-month growth for the last six months, saw a sharp jump in sales in October. Both the passenger car and the two-wheeler segments received a festive boost in October. Maruti Suzuki India Ltd announced a 17.6 per cent jump in its domestic passenger vehicle sale at 163,656 units in October. In the two-wheeler segment, Hero MotoCorp sold a record of 806,848 vehicles in October — its highest-ever monthly sales in any single month. Other manufacturers, too, reported positive numbers.
A report by Pranjul Bhandari, chief India economist, HSBC Global Research said, “Strong gains in the Manufacturing PMI, GST revenues and core industries … are likely to have been led by a combination of festive and pent-up demand, despite fiscal expenditure being rather subdued through the pandemic. There are indications of logistics and labour-led supply constraints easing, but funding constraints continue to bite.” The report, however, pointed that while there is some recovery in core industries, it is still well below the normal.
While the banking sector continues to see muted credit growth (6 per cent in August and -1.6 per cent for first five months of FY21), domestic air passenger traffic, domestic air cargo, port cargo and exports and imports continue to remain below February base levels.
Among the areas facing challenges, hotels, tourism and hospitality is on the top. In India, tourism’s share in GDP has been declining over the last 10 years, but the contribution of tourism to employment increased somewhat, from 10 per cent in FY09-10 to 13 per cent in FY18-19, as per a latest World Bank report on Covid-19 impact on South Asian economies.
Banks are the other weak spot in the economy and credit growth continued to remain low. For the fortnight ended October 9, bank credit growth stood at 5.7 per cent and for the financial year till October 9, the credit growth is (-) 0.3 per cent. Bank credit to the commercial sector recorded a growth of 5.8 per cent mirroring weak credit demand and increased risk aversion in the banking system.
Sustainability of recovery post festive season and credit expansion by banks will hold the key going forward.
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