India’s multi-speed recovery: Some sectors continue to do well, while others are still in decline
October 23, 2020 7:00 AM
Several activity indicators have moved from the negative to the positive. And yet, looking under the hood suggests that this is not an even recovery.
A cursory glance suggests that about 67% of the indicators are in the top two quadrants, signalling strong recovery.
By Pranjul Bhandari, Aayushi Chaudhary & Priya Mehrishi
After a sharp 24% contraction in GDP in the quarter ending June, things have improved meaningfully, particularly since September. Several activity indicators have moved from the negative to the positive. And yet, looking under the hood suggests that this is not an even recovery. Consumption is up while investment is down, manufacturing is up while services is down, formal sector is gaining market share at the cost of the informal sector, and capital markets are buoyant though the banking sector faces many challenges.
In this note, we bring together 30-odd indicators and place them across four quadrants to gauge the strength of sequential and year-on-year recovery (see graphics).
We find that the 30-odd indicators we track are well spread out across the four quadrants: (1) picked up during lockdown, still strong, (2) recovering from a low base, (3) in decline, and (4) lockdown boom fading. This, to us, illustrates a multi-speed recovery.
Furthermore, each quadrant tells a story: Quadrant 1 highlights the sectors that have seen significant gains led by the nature of the pandemic, and continue to perform well. Car and two-wheeler sales have been buoyant as an alternative to public transport. Strong government current expenditure highlights the social welfare spending of the government. The rise in GST revenues and power demand, in our view, reflect pent-up demand following the lockdown, doubled up by festival-related demand.
Quadrant 2 highlights the sectors limping back from the lockdown. Rail and air travel have risen sequentially as has demand for consumer durables, though each of them remain well below the levels in the same time last year.
Quadrant 3 includes those sectors that continue to decline and may take more time to recover. These include capital goods and inputs such as steel. Even in previous recoveries, we found that capex was the last to recover; understandable, given large excess capacity in the economy.
Quadrant 4 includes those sectors that gained over the last few months, but the exuberance may be fading now. Indeed, rural India benefited from normal rains and government spending through the kharif season. But the spurt may not last if some of the pre-existing structural constraints to growth catch up.
A cursory glance suggests that about 67% of the indicators are in the top two quadrants, signalling strong recovery. But once weighted by their share in GDP, they make up a smaller 40% of GDP.
Our takeaway from this analysis is that the longevity of recovery will depend on how successfully indicators move from quadrant 2 to quadrant 1, which is to say how the recovering sectors continue to recover. It would also depend on how successfully indicators move from quadrant 3 to quadrant 2, which is to say that the sectors worst hit find some space to grow again.
(Excerpted from India Economics Comment, HSBC Global Research, dated October 21.)
(Bhandari is chief India economist, Chaudhary is economist and Mehrishi is economics associate, HSBC Global Research)