Indian economy is running on two tracks in parallel, and global headwinds have arrived.
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The dynamics of Indian economy as 2021 ends
- State of Indain economy: If an innocent question is asked "how is the Indian economy doing", the answer would depend on which part of the economy one would focus on. It depends also on the data available. The economy seems to be on two tracks: the despondent, and the bullish.
- Recovery: There are sectors showing a sustained recovery, almost in sync with the dropping trajectory of active Covid-19 cases in the country. But there are sectors not doing well at all.
- These two diametrically opposite situations are however, facing one common enemy – cost-push inflation and shortages in international value chains
- Both these problems can be decelerators for future growth
- Consumers and investors: There is a wide gap between consumer confidence and investor confidence.
- Consumers - Results of the September round of the Consumer Confidence Survey (CCS) of the Reserve Bank of India were published on October 8. The Current Situation Index (CSI) was at 57.7. CSI is calculated by adding 100 to the average of net responses (difference between share of respondents who reported an improvement and deterioration) of general economic situation, employment scenario, price level, household income and overall spending.
- A CSI value below 100 implies the share of respondents who reported an improvement was less than those who reported a worsening. To be sure, the September CSI value is the highest since the July 2020 round of CCS. However, it is still lower than the May 2020 reading of 63.7. CSI has not been above 100 since March 2019, which was a one-off spike after consecutive below 100 readings since June 2017. These numbers highlight the underlying, perhaps entrenched weakness, on the demand front in the Indian, or urban Indian, economy. CCS is only carried out in 13 major cities.
- Investors - While the Indian economy is not expected to regain pre-pandemic levels in the first half of the current fiscal year, stock markets remain at a record high! The bull run in stock markets is not just about the formal part of the economy – whose shares are listed in such markets – doing better. There is an optimism about the future, evident when one compares the price to earnings (PE) multiple for major stock markets in the world.
- The PE multiple captures the price of a share as a multiple of earnings; the higher the value, the greater is the belief that it will generate higher earnings in the future.
- This stark divergence in investor confidence in stock markets and consumer confidence is a good indicator of the class divide in the perception of the Indian economy.
- Blue-collar versus white-collar incomes: Apart from general exuberance, the formal sector, especially its white-collared component, has made an impressive recovery. The latest direct tax numbers show it, both in corporation tax (levied on profits) and in income tax (levied on salaries).
- Data from the Controller General of Accounts (CGA) shows that direct tax collections have recovered strongly and are significantly above pre-pandemic levels in nominal terms.
- On the other hand, data on rural wages – the best proxy for wages of unskilled labour in India – until July, the latest available, shows growth compared to pre-pandemic levels has been much lower.
- Clearly, the trajectory of white-collar and blue-collar incomes is very different in the Indian economy. Most high-frequency indicators of the economy are driven by formal sector indicators, whereas the stress in the informal sector takes time to reflect in economic statistics.
- Double-digit inflation expectations and supply side constraints: India’s carmakers are facing a unique problem. While orders are showing an improvement, they are actually having to trim production. The auto industry witnessed ~32% QoQ improvement in wholesale despatches in Q2FY22” even as “an increasing number of Original Equipment Manufacturers (OEM) declared production cuts (20-40% demand) despite strong demand.” The shortages of semiconductor chips and elevated logistics costs are major factors holding back supplies.
- This comes at a time when inflation expectations are close to their all-time high in India.
- While headline retail inflation, as measured by the Consumer Price Index (CPI), fell to 5.3% from 6.3% between June and August, median inflation expectations remained elevated. All three measures – current, three months ahead and one year ahead – were in double digits. These are very high levels historically.
- With prices of crucial commodities such as crude oil continuing to rise – Brent crude was at $84.23 on October 11 – there is unlikely to be any relief on inflation.
- Asian trouble: The disruption in global value chains and price pressures might compromise potential gains from exports for Asian economies. Asian exporters are currently dealing with a problem of plenty. Too strong demand and rolling global supply chain bottlenecks have hobbled their orders and sent freight rates soaring. The spill over effects from a slowing China and a normalization of goods demand in Western economies, especially the US, will worsen things. The export cycle has peaked, and a slowdown is likely to materialize next year.
- What India haas done: India's politicians ensured during the pandemic that the formal sector did not run into problems. They ensured credit guarantees and liquidity infusion, but refrained from boosting demand directly (by supporting incomes in the informal sector). This gamble would have worked, had the disruption in global value chains and commodity price inflation not emerged as a big disruptor for formal sector activity. Now, the strategy may come unstuck.
- EXAM QUESTIONS: (1) Indian policymakers chose a supply-side approach on the economy, during the pandemic, but two major crises may undo the gains. Explain which ones, and why. (2) Why are India's stock markets rising and shining, when the majority of population is struggling to make ends meet? List five factors.
#Fiscal #Monetary #Exports #formal #informal
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