Economy looking up at the end of the first half of FY22

India ended the first half of the current fiscal with lots of good news on the economic front. The Purchasing Managers Index (PMI) for manufacturing for September is 53.7, up from 52.3 in August; the index of eight core sectors was 133.5 in August, higher than its value in that month in both 2020 and 2021; goods and services tax (GST) collections in September were ₹1.17 lakh crore, the second highest this financial year and the fourth higher since July 2017; and the Nomura India Business Resumption Index (NIBRI) was at an all-time high of 105 for the week ending September 26.

The month also saw a record 236 million doses administered; by September 30, 1 in four eligible Indians had been fully vaccinated and another 44% had received one dose of the vaccine.

The happy picture at the end of the first half is a stark contrast to that at the end of the first quarter, the period from April to June, when the country was ravaged by the second wave of Covid-19 infections. The Indian economy grew by 20.4% in the June quarter, largely on account of the base effect; it contracted by 24.4% in the corresponding quarter of 2020-21, courtesy a federal lockdown.

With most high frequency indicators showing a revival in the September 2021 quarter, is the worst behind the economy?

The answer might not be an unambiguous yes, according to another set of indicators. This tension between these two trends is likely to dominate the discussion when the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) assembles for its customary bimonthly meeting which will begin on October 6.

There is no doubt that economic activity has been increasing gradually in the second quarter, but questions remain about the depth of economic recovery and its impact on employment.

NIBRI has emerged as one of the most popular ultra-high frequency—it is released every week—measures of economic activity. NIBRI is a weekly indicator of economic activity which takes into account Google mobility indices, driving mobility from Apple, power demand, and the labour force participation rate. A NIBRI value of 100 refers to pre-pandemic level (February 23, 2020) of economic activity and subsequent data entries have been indexed to it. NIBRI crossed the psychological threshold of 100 for the first time since the pandemic in the week ending August 15. It reached an all-time high of 105 in the week ending September 26. NIBRI had reached 99.3 in the week ending February 21, before the second wave derailed the ongoing recovery and pushed NIBRI to 60.3 once again in the week ending May 23.

The composite PMIs, which had fell from 57.3 in February to 43.1 in June 2021—PMI value above 50 signifies expansion in economic activity compared to the previous month—recovered to 55.4 in August. With PMI manufacturing for September 2021 showing an increase over its August value (53.7 from 52.3), chances are, the composite index will increase further this month. PMI Services data for September will be released on October 5.

The index of eight core sector industries—it includes coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity—for August (133.5) was higher than both the August 2020 (119.7) and August 2019 (128.5) values. To be sure, there was a sequential moderation in the index compared to July 2021 (134.7).

The Index of Industrial Production (IIP) for the month of August, which looks at a broader range of manufacturing activity including consumer goods, will be released on October 12. GDP numbers for the September quarter will be released on November 30. RBI’s estimate for growth in the quarter is 7.3%.

These numbers need to be read with a caveat though. The higher frequency an indicator, the higher is its formal sector bias. For example, Nomura Global Markets Research said that the latest spike in NIBRI could have been driven by a boost to Apple Driving Index in the cities of Hyderabad and Pune. Similarly, both core sector index and PMI numbers are also likely to have a strong formal sector bias. Even here, the employment recovery seems to be lagging behind output recovery. “Firms continued to purchase extra inputs in September, but jobs were little changed over the month. In some instances, survey participants indicated that government guidelines surrounding shift work prevented hiring,” Pollyanna De Lima, economics associate director at IHS Markit, the agency which collects PMI data, said.

Apprehensions have also been expressed about the ongoing economic recovery tilting the scales in favour of bigger firms, putting a squeeze on earning of smaller players in the economy.

A September 29 research note by Samiran Chakraborty and Baqar Zaidi at Citi Research underlined the uneven nature of the ongoing economic recovery. “Demonstrating an uneven recovery, there is a wide divergence in the performance of different activity variables—the best performing one is 47% higher than its pre-pandemic level, while the worst is 48% below”. To be sure, the note does point out that things are getting better. “Around 16 of the total 31 variables in the heat map are above pre-pandemic levels, compared to just seven variables three months ago. This suggests that the economic recovery is becoming broad-based.”

The fact that the formal sector is doing much better than the informal sector is also reflected in the buoyant stock market—BSE Sensex crossed the 60,000 mark earlier this week—which factors in earnings of large firms. Even the central government fiscal numbers until August 2021, show a strong improvement in direct tax numbers, which are paid for formal sector employees and companies. Indirect tax collections, once the windfall gains from petrol-diesel taxes are factored out, look far more sober.

Inflation could play spoilsport even for this skewed recovery. Brent crude, the international benchmark of crude petroleum price, crossed $80 per barrel after three years earlier this week. This has triggered a fresh round of increase in prices of petrol, diesel, and cooking gas, which were already at high levels. India’s crude oil basket (COB) was priced at $76.71 per barrel on September 30. If the cascading effects of higher fuel prices continue to feed general price levels, the moderation in inflation seen in the past two months could see a reversal. Consumer Price Index (CPI) growth has seen moderation, from 6.3% in May 2021 to 5.3% in August. The September 2021 CPI numbers will be released on October 12. Higher prices at a time when employment growth is patchy and smaller businesses have lost market power can put a squeeze on mass earnings.

Because the Union and state governments have refused to reduce taxes on petrol-diesel, inflation expectations might raise even further. “The worst thing which can happen at the moment is a wage-price spiral in unskilled wages. This will trigger a vicious cycle where higher prices will lead to demand for higher wages which will drive prices even higher,” said Himanshu, an associate professor of economics at Jawaharlal Nehru University.

There will be more clarity on these issues when the latest results of RBI’s Consumer Confidence Survey and Inflation Expectations Survey of Households are published. But purely in terms of numbers, it’s been a good start to the second half.