Vijay Kumar Gaba

The latest macro data indicates that the Indian economy may be standing at an inflection point. Having survived a major accident in the form of Covid19 pandemic, the economy looks stable, having progressed well to reach closer to the pre Covid level of activity. Of course, for next few quarters the economy may still need to use the support of government spending, before the virtuous cycle of higher investment and consumption kick starts.

Post pandemic, the challenges before the government are multifold; and so are the opportunities. A successful resolution of these challenges could trigger a virtuous cycle of growth and catapult the economy to the higher orbit. A failure may not be an option, as it could cause a disaster of unfathomable proportion.

Besides, merely achieving a full ‘V’ recovery to the pre pandemic level of economic activity will be inadequate, since pre pandemic the economy was slowing for many years and was completely unable to generate adequate jobs for the burgeoning youth population. The government will need to apply multiple accelerators for the sustainable growth to reach to the target of 8% plus.

The pandemic has widened the divide in the society, as the recovery so far has been rather ‘K’ shaped. Income and wealth inequalities have widened. Disparities in access to digital infrastructure have amplified the divide in social sectors like healthcare and education. The gap between organized and unorganized sectors has enlarged materially. To maintain harmony and peace in the society, these gulfs would need to be managed.

As per a study done by the Azim Premji University scholars, “one year of Covid-19 pandemic has pushed 230 million people into poverty with a 15 per cent increase in poverty rate in rural India and a 20 per cent surge in urban India."

CMIE data showed that “the unemployment rate has gone up as high as 12 per cent in May 2021, 10 million jobs have been lost just on account of the second wave and 97 per cent of the households in the country have experienced declines in incomes”.

The labour force participation rate was at 40.22% in the period between May-August 2021, according to latest data by the CMIE. It has remained at about 40% since the start of the pandemic, compared to about 43% before it. This is the lowest the labour force participation rate has been since 2016, when data was first compiled.

Exports, one of the key growth drivers, have persistently failed to deliver in past one decade. There is no sign of any major improvement in exports, especially when the global growth has already plateaued after post pandemic push. Considering that India’s capex is closely related to exports and global trade, the probability of any material pick up in private capex appears slim.

Poor export growth and high petroleum and gold imports have resulted in sharp increase in trade deficit for India. Consequently, INR has come under pressure. USDINR is its weakest level now and looking even more vulnerable given its outperformance vs EM peers in past one year.

Persistent food and energy inflation is key concern, though other industrial input prices have shown signs of stabilizing. Given the poor wage growth for semi-skilled and unskilled workers, a large part of the population is reeling under the impact of stagflation, hurting the consumer sentiments. Consumption slowdown is one of the key economic concerns currently.

The best thing for Indian economy is that the government has sufficient fiscal leverage available to accelerate the investments. At Rs5.5bn the FY22e gross fiscal deficit is lower than the pre pandemic years. The April-October 2021 fiscal deficit is just ~36% of budget estimates. The government has thus gathered enough ammunition by adhering to higher duties on fuel and lower revenue spending to manage its fiscal balance. Buoyant revenue and aggressive disinvestment may help in improving it further.

India's trade gap widened to $13.93 billion in March of 2021 from $9.98 billion a year earlier. The trade gap was however lower than the preliminary estimates of a higher $14.11bn. The key highlights of trade data were as follows:

·         In March 2021 exports soared 60.3% to a record high of $34.5bn (up from $27.5bn in Feb’21), marginally higher than the preliminary estimate of $34bn.

·         The exports surged ~60% yoy in March, driven mainly by $6bn rise in non-petroleum products’ export.

·         Imports in March 2021 were $48.4bn ($40.5bn in Feb’21), led by non-petroleum imports of $38.5bn ($31.5bn in Feb’21). Imports surged 54% yoy

·         Overall exports contracted by ~7.2% yoy in FY21, a reasonable figure given the difficult period for trade due to global lockdowns.

·         Imports were down 17% yoy in FY21, mainly on account of 37% lower petroleum import due to lockdown and mobility restrictions.

·         Trade deficit widened in March 2021 to $13.9bn ($12.6bn in February and $9.98bn in March 2020)

·         Pharma exports maintained high growth in March, growing 49% yoy to $2.3bn, an all-time high.

·         For FY21, India recorded current account surplus equal to 1% of GDP, due to lower imports and higher FPI flows. Overall BoP surplus in FY21 was $84bn.

I usually do not like to read too much into monthly macro data, unless there is a sustainable trend that could be reasonable extrapolated to future periods. However, I find that any decision based on headline trade data might be erroneous. It is important to factor in the details. For example, consider the following:

(a)   While almost all items recorded positive growth, majority of the growth in imports and exports was driven by abnormal growth in a handful of items.

Out of ~$17bn yoy increase in exports, gold imports alone accounted for 50% delta or $8.3bn. Reportedly, gold imports touched 98.6 tons in Mar 2021 from 13 tons a year ago.

(b)   Export’s growth was led by the growth Engineering products’ export, which accounted for almost one third of the export growth. It is estimated that large stimulus spending in trade partner countries led to higher engineering product growth. However largest export growth was recorded in Iron Ore, led by sharp rise in prices.

(c)    With fresh mobility restrictions the trade momentum may slow down again. FPI flows may also taper this year reducing the CAD and BoP surplus. The consensus appears a CAD deficit of ~1% for FY22. INR may therefore

On the positive side, the advance economies are outpacing the emerging economies in growth recovery. This trend augurs well for Indian exports, especially engineering goods. A weaker INR (my view 74-74.50/USD average for FY22) might be an added advantage.