Slack, recovery and overheating: the Indian economy has it all


What is the state of the Indian economy? It depends on what part of the economy we are looking at. It also depends on the timeframe for the availability of relevant data. Based on the latest statistics, there is no clear answer.

There are parts that show things, and more importantly, the feeling, is even worse than it was before the Covid-19 pandemic hit. But there are also indicators that are in the green and extremely optimistic players. Some sectors are showing a sustained recovery, almost in line with the declining trajectory of active Covid-19 cases in the country. These diametrically opposed situations and sentiments face a common problem: cost inflation and shortages in international value chains, both of which can generate strong headwinds for growth.

A significant gap between consumer confidence and that of investors

The results of the September cycle of the Reserve Bank of India’s Consumer Confidence Survey (CCS) were released on October 8. The current situation index (CSI) was 57.7. The CSI is calculated by adding 100 to the average of the net responses (difference between the share of respondents who reported improvement and deterioration) of the general economic situation, employment scenario, price level, household income and overall expenses.

A CSI value of less than 100 implies that the proportion of respondents who reported improvement was lower than those who reported worsening. Granted, the September CSI value is the highest since the July 2020 CCS cycle. However, it is still below the May 2020 reading of 63.7. The CSI has not crossed 100 since March 2019, which was a one-time spike after consecutive readings below 100 since June 2017. These numbers highlight the underlying, perhaps entrenched, weakness on the currency front. demand in Indian or urban Indian economy. CCS is only practiced in 13 major cities.

Not everyone is bearish about the Indian economy. Take the stock markets, for example. While the Indian economy is not expected to return to pre-pandemic levels in the first half of the current fiscal year, stock markets remain at an all time high. The bullish race in the stock markets is not just about the formal part of the economy – whose stocks are listed on these markets – which is doing better. There is also a great degree of optimism about the future, which is evident when comparing the price-to-earnings (PE) multiple for the world’s major stock markets. The PE multiple captures the price of a stock as a multiple of earnings; the higher the value, the greater the belief that it will generate higher income in the future.

The divergence of investor confidence in the stock markets and consumer confidence is a good indicator of the class divide in the perception of the Indian economy.

The divergence of blue-collar and white-collar incomes

Not all stock market optimism is exuberance. The formal sector, in particular its white collar component, has experienced an impressive recovery. This is best seen in the latest direct tax figures, not just corporate tax (levied on profits) but also income tax (levied on wages).

Data from the Comptroller General of Accounts (CGA), which gives tax figures through August, shows that direct tax collections have recovered sharply and are significantly above pre-pandemic levels in nominal terms. On the other hand, data on rural wages – the best indicator of the wages of unskilled labor in India – through July, the latest available, show that growth over previous levels. the pandemic was much weaker.

This comparison shows that the income trajectory of white collar and blue collar workers is very different in the Indian economy. It is important to understand that most high frequency indicators of the economy are determined by indicators of the formal sector, while stress in the informal sector takes time to be reflected in economic statistics.

Double-digit inflation expectations and tightening supply-side constraints

Indian automakers face a unique problem. While the orders show improvement, they actually need to reduce production. According to an ICICI Securities research note dated Oct. 10, “the auto industry saw an approximate 32% improvement in the QoQ of wholesale shipments in the second quarter of fiscal 22” even as “A growing number of original equipment manufacturers (OEMs) have reported production cuts (20-40% demand). despite strong demand. The memo cites shortages of semiconductor chips and high logistics costs as major factors hampering supplies.

The production shortage and rising costs come at a time when inflation expectations are nearing all-time highs in India. While headline retail sales inflation, as measured by the Consumer Price Index (CPI), fell to 5.3% from 6.3% between June and August, median inflation expectations remained high. All three measures – current, three months ahead and one year ahead – were in double digits. These are very high levels historically.

With the prices of essential commodities such as crude oil continuing to rise – Brent crude was at $ 84.23 on Oct. 11 – there is unlikely to be any relief from inflation.

A note from Nomura’s global market research suggests that disruption of global value chains and pricing pressures could undermine potential export gains for Asian economies. “Asian exporters are currently facing an abundance problem. Too much demand and continued bottlenecks in the global supply chain have hampered their orders and driven freight rates up. As supply bottlenecks are a short-term hurdle and technology demand still looks strong, we see storm clouds on the horizon, due to the spillover effects of the China’s slowdown and a normalization of demand for goods in Western economies, especially the United States. In our opinion, the export cycle has reached its peak and a slowdown should materialize next year, ”the note said.

India’s policy choices during the pandemic have focused on ensuring that the formal sector does not run into problems (by ensuring credit guarantees and the injection of liquidity) rather than directly stimulating demand (by supporting incomes in informal sector). The gamble could have paid off if the disruption of global value chains and the inflation of commodity prices had not appeared to be a major disruptor for formal sector activity.

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