The second advance estimates (2AE) of FY21 India GDP have been released final week. The 1AE and 2AE are projected based on extrapolations from restricted information out there, initially for information out there at the most till October and November, and thereafter till December or January of FY21 for 2AE. The official revision of FY21 development estimates was surprisingly more conservative than street forecasts, specifically for the manufacturing sector. The divergence raises many troubles, requiring a deeper understanding of the estimation proxies, but that is a subject for an additional discussion.
While media commentary has focused largely on the GDP development prints, the more acceptable measure of financial 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 development for the third quarter of FY21 is estimated at 1%, and the implied development for the fourth quarter (constant with the complete FY21 print) is 2.5%. This report attempts to assess the ongoing momentum of financial 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 financial activity, comprising an substantial 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 robust bearing on the ongoing recovery and the probably evolution of official development revisions.
Globally, whilst the second and third waves of Covid infections look to be subsiding, there are issues that some states in India—particularly Maharashtra—are displaying indicators of a resurgence. The quantity of active situations has also turn out to be net positive. The case increments as a result far are concentrated in a somewhat compact set of districts, but we await benefits of genomic sequencing for proof of new strains. While we retain our fingers crossed that the rise in new situations in some states in India progressively recedes, Axis Bank’s Composite Index of Economic Activity is displaying indicators of a plateauing about 3% under pre-lockdown levels (see accompanying graphic).
A heatmap of the many variables tracked in the set of the Leading Indicators also shows the weakening recovery in varying degrees. Freight and transport signals stay largely robust. Both rail and port freight development are positive, indicating each internal and trade site visitors (and constant with export development, while aspect of this is due to higher commodities rates). But other signals are mixed. Growth in FASTag collections stay robust, but this is also probably due to enhanced adoption. This inference is also supported by mobility metrics, which shows a broad tapering off of work-associated travel, while increasing recreation and purchasing-associated movement (which are probably to be shorter distance). Fuel consumption development in 2021 had also remained at December levels, even as car registrations have fallen sharply. e-Way bill generation for GST has also remained rather static considering that October 2020 this is a robust indicator of freight movement.
Electricity consumption is but an additional robust indicator of activity. After robust increases in January and early February, demand has once more converged to 2020 levels (see graphic) this suggests that the cold climate may have had a function in the earlier development.
Official manufacturing and trade information assistance these inferences. Base effects in the index of eight core sector industries have been minimal in development more than November – January, indicating that the development prices are reflective of output. India’s export development, even so, has been pretty very good for the previous couple of months, while the impact of higher commodities rates wants to be improved understood.
Jobs and employment stay a matter of concern. While CMIE information shows an enhancing unemployment price in urban locations, it is increasing in rural. This is also supported by MNREGA claims a quantity of persons demanding work beneath this scheme has been increasing considering that December 2020, and incremental persondays work generated has also remained higher, indicating continuing dependence on this earnings assistance scheme.
While indicators of weaker activity momentum considering that January 2021 is a be concerned, we believe that recovery may in fact be somewhat stronger for the following causes. Both manufacturing and services sub-indices (while the quantity 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 incorporated in the consolidated Index, largely mobility associated). Note, also, that these indicators are largely quantity oriented and that nominal development is probably to be improved, which offered the methodology of GVA calculations, will also show up in larger genuine GVA development.
One essential driver of development 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 development had picked up to 6.6%, but the actual quantum of credit remains rather low. The NBFC sector, which appears to have largely normalised is also accelerating lending, based on anecdotal and media reports and on the basis of Q3 benefits. The issuance of corporate bonds also remains robust. However, a lot of these flows of funds look more in the nature of refinancing, and of working capital demand, in aspect due to larger commodities input rates. There are indicators of brownfield expansion in chosen industries, but a important cyclical resumption of private sector capex is in all probability nevertheless some time away till capacity utilisation picks up across a variety of sectors. In this context, the public sector capex assumes value, not least for its function in progressively crowding in private investment.
Government spending, each at the Centre and states, will have an critical bearing on reviving and accelerating the recovery momentum. Fiscal information for January show that tax receipts of the Centre continues to accelerate, with revenues more than the period April-January FY21 virtually at levels of the corresponding months final year. Expenditure development for the duration of this period is up considerably (11% yoy), driven by enhanced spending in each income and capital accounts. Higher capital expenditures, in addition to spending on defence and roads, is also due to enhanced grants to states. Based on the spending projected in Q4 in the Budget RE, spends have to enhance even more in February and March.
More than FY21, although, the genuine concentrate wants to be sustaining development momentum beyond the increase in FY22. The reforms envisioned in logistics and electrical energy want to be executed swiftly, with the larger capital expenditures only a aspect of the general approach reforms.
The author is Executive vice president and chief economist, Axis Bank. Views are individual