The second advance estimates (2AE) of FY21 India GDP were released last week. The 1AE and 2AE are projected based on extrapolations from limited data available, initially for data available at the most till October and November, and thereafter till December or January of FY21 for 2AE. The official revision of FY21 growth estimates was surprisingly more conservative than street forecasts, particularly for the manufacturing sector. The divergence raises multiple issues, requiring a deeper understanding of the estimation proxies, but that is a topic for another discussion.
While media commentary has focused largely on the GDP growth prints, the more appropriate measure of economic activity is the Gross Value Added (GVA)—growth for FY21 is estimated at -6.5%, revised up from the -7.2% estimate in early January. GVA growth for the third quarter of FY21 is estimated at 1%, and the implied growth for the fourth quarter (consistent with the full FY21 print) is 2.5%. This article attempts to assess the ongoing momentum of economic recovery as we move into the third month of quarter.
This assessment is based on the signals from a set of “leading indicators”, which we track as “nowcasters” of economic activity, comprising an extensive set of 39 “less lagging” and concurrent indicators. These can be broadly grouped into domestic and external activity (manufacturing and services, consumption and investment), fiscal numbers, mobility, employment and payments. These indicators have a strong bearing on the ongoing recovery and the likely evolution of official growth revisions.
Globally, while the second and third waves of Covid infections seem to be subsiding, there are concerns that some states in India—particularly Maharashtra—are showing signs of a resurgence. The number of active cases has also become net positive. The case increments thus far are concentrated in a relatively small set of districts, but we await results of genomic sequencing for evidence of new strains. While we keep our fingers crossed that the rise in new cases in some states in India gradually recedes, Axis Bank’s Composite Index of Economic Activity is showing signs of a plateauing about 3% below pre-lockdown levels (see accompanying graphic).
A heatmap of the multiple variables tracked in the set of the Leading Indicators also shows the weakening recovery in varying degrees. Freight and transport signals remain largely robust. Both rail and port freight growth are positive, indicating both internal and trade traffic (and consistent with export growth, although part of this is due to high commodities prices). But other signals are mixed. Growth in FASTag collections remain strong, but this is also likely due to increased adoption. This inference is also supported by mobility metrics, which shows a broad tapering off of work-related travel, although rising recreation and shopping-related movement (which are likely to be shorter distance). Fuel consumption growth in 2021 had also remained at December levels, even as vehicle registrations have fallen sharply. e-Way bill generation for GST has also remained quite static since October 2020; this is a robust indicator of freight movement.
Electricity consumption is yet another strong indicator of activity. After strong increases in January and early February, demand has again converged to 2020 levels (see graphic); this suggests that the cold weather might have had a role in the earlier growth.
Official manufacturing and trade data support these inferences. Base effects in the index of eight core sector industries have been minimal in growth over November – January, indicating that the growth rates are reflective of output. India’s export growth, however, has been very good for the past couple of months, although the effect of high commodities prices needs to be better understood.
Jobs and employment remain a matter of concern. While CMIE data shows an improving unemployment rate in urban areas, it is rising in rural. This is also supported by MNREGA claims; a number of persons demanding work under this scheme has been rising since December 2020, and incremental persondays work generated has also remained high, indicating continuing dependence on this income support scheme.
While signs of weaker activity momentum since January 2021 is a worry, we think that recovery might actually be somewhat stronger for the following reasons. Both manufacturing and services sub-indices (although the number of indicators for the latter are thin) signal that activity is at pre-lockdown levels. (The slight gap in these levels is due to the difficulty of classification of the indicators which are included in the consolidated Index, largely mobility related). Note, too, that these indicators are largely quantity oriented and that nominal growth is likely to be better, which given the methodology of GVA calculations, will also show up in higher real GVA growth.
One crucial driver of growth will be a pickup in credit offtake from banks, NBFCs and capital markets. Bank credit offtake remains moderate; for the fortnight ended February 12, credit growth had picked up to 6.6%, but the actual quantum of credit remains quite low. The NBFC sector, which seems to have largely normalised is also accelerating lending, based on anecdotal and media reports and on the basis of Q3 results. The issuance of corporate bonds also remains robust. However, a lot of these flows of funds seem more in the nature of refinancing, and of working capital demand, in part due to higher commodities input prices. There are signs of brownfield expansion in selected industries, but a significant cyclical resumption of private sector capex is probably still some time away till capacity utilisation picks up across a range of sectors. In this context, the public sector capex assumes importance, not least for its role in gradually crowding in private investment.
Government spending, both at the Centre and states, will have an important bearing on reviving and accelerating the recovery momentum. Fiscal data for January show that tax receipts of the Centre continues to accelerate, with revenues over the period April-January FY21 almost at levels of the corresponding months last year. Expenditure growth during this period is up significantly (11% yoy), driven by increased spending in both revenue and capital accounts. Higher capital expenditures, in addition to spending on defence and roads, is also due to increased grants to states. Based on the spending projected in Q4 in the Budget RE, spends have to increase even more in February and March.
More than FY21, though, the real focus needs to be sustaining growth momentum beyond the boost in FY22. The reforms envisioned in logistics and electricity need to be executed rapidly, with the higher capital expenditures only a part of the overall process reforms.
The author is Executive vice president and chief economist, Axis Bank. Views are personal