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Thursday, September 16, 2021

July: Growth indicators gain pace, but risk aversion may put brakes

Rising commodity prices and shipping costs could continue to impact the larger industry through the current quarter and beyond, and slow the momentum of recovery.

By: ENS Economic Bureau | New Delhi |
August 16, 2021 3:45:02 am
Rising commodity prices and shipping costs could continue to impact the larger industry through the current quarter and beyond, and slow the momentum of recovery. (File Photo)

Desperate attempts by some economic actors to come out of a crisis that lasted for a frustratingly long period enabled some indicators to move up in July after being trammelled by the second Covid wave in May-June.

However, since the principal economic agents — private investors, lenders and consumers — don’t yet seem to have overcome an extreme risk aversion and the government-sector doesn’t appear to be living up to its task, the pace of recovery in the second half of FY22 could be lower than predicted by government managers.

As it happens, credit growth continues to be subdued and industrial output is below the pre-Covid level. Also, the services sector that constitutes much of the aggregate demand is weak.

Though a section of Corporate India reported decent operating margins even in Q1 by reining in costs, that hardly reflects the state of the economy; profits of most firms remain under pressure and the MSMEs are in graver crisis.

Rising commodity prices and shipping costs could continue to impact the larger industry through the current quarter and beyond, and slow the momentum of recovery.

Finance Minister Nirmala Sitharaman made it clear that growth is being accorded top priority and the monetary policy stance is in concert with this approach. However, given that inflationary pressures are real and the US Federal Reserve has signalled its intent to raise interest rates later this year, the Reserve Bank of India may have to soon start gradually unwinding the monetary stimulus; it dropped hints of this at the latest policy review. The RBI may also shift stance from ‘accommodative’ to ‘neutral’ and even hike rates marginally by the end of the current fiscal year.

As for the high-frequency indicators, gross Goods and Services Tax (GST) collections came in at an impressive Rs 1.16 lakh crore in July (largely June transactions), up a third-on year and a quarter on-month. That in July, the average daily e-way bill generation was 14 per cent higher than the level in June and 60 per cent higher than in May indicates the August collections (from July sales) could be even higher.

Manufacturing activity, as measured by the Purchasing Managers Index (PMI), reversed a contraction witnessed in June and grew at its fastest pace in three months in July, as states relaxed curbs imposed in the wake of the second Covid wave. Output rose at a robust pace, with over one-third of companies reporting a monthly expansion in production. But services activity shrank for a third straight month in July, although the contraction level narrowed from June.

Merchandise exports exceeded the pre-pandemic level (same months in 2019) for five months in a row through July.

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