Animal spirits stabilize in August even as virus rages across economy; manufacturing, services improve

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September 25, 2020 10:26 AM

India’s economy showed signs of stabilizing in August with manufacturing and services gradually improving even as coronavirus cases escalated across the country.

The uptick in demand is expected to gain momentum in the coming weeks with the festive season round the corner.

India’s economy showed signs of stabilizing in August with manufacturing and services gradually improving even as coronavirus cases escalated across the country. Five of the eight high-frequency indicators compiled by Bloomberg News gained last month, while two were unchanged and one deteriorated. That kept the needle on a dial measuring so-called animal spirits steady at 4 — a level arrived at by using the three-month weighted average to smooth out volatility in the single-month readings.

A strong rebound is still a far way off though as a surge in virus cases continues to disrupt activity and has led many economists to downgrade their growth forecasts for the year.

Business Activity

Activity in India’s dominant services sector continued to pick up, with the main index rising to 41.8 in August from 34.2 in July. While that’s a marked improvement from April’s record low of 5.4, a number below 50 suggests it’s still in contraction territory.

Manufacturing bounced back into expansion after four successive months of contraction, with the purchasing managers index rising to 52 from 46 in July. That helped push the composite index for August to 46 from 37.2 a month earlier.

Exports

Exports suffered because of tepid global demand, with shipments falling 12.7% in August from a year earlier. Farm exports and shipments of drugs and pharmaceuticals bucked the trend, growing 22% and 17%, respectively. On the imports side, demand for gold was strong ahead of the festival season, resulting in a widening in the trade deficit.

Consumer Activity

Car sales, a key indicator of consumer demand, rose 14.1% in August from a year earlier, although the growth was from a weak base last year. Retail sales too showed signs of picking up, even though the number of consumers venturing out to buy goods was still 70% below the year-ago level, according to ShopperTrak.

Those increases didn’t translate into greater demand for loans. Central bank data showed credit grew 5.5% in August from a year earlier, slower than the 12% growth seen a year ago. To make matters worse, liquidity conditions tightened during the month.

Industrial Activity

Industrial production fell 10.4% in July from a year earlier, shallower than June’s revised contraction of 15.8%. Capital goods output — a key indicator of demand in the economy — dropped 22.8% from a year earlier.

Output at infrastructure industries shrank 9.6% in July from a year ago and was slightly better than the 12.9% decline in June. The sector, which makes up 40% of the industrial production index, had contracted by a record 37.9% in April. Both data are published with a one-month lag

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