The various indices released by the central bank, government and independent research agencies are indicating a deceleration in economic activities compared to the previous year performance. The current scenario does not seem to be very promising .The economy was shrinking in the last fiscal already, and so if we are doing even worse than that, it is surely a matter of concern. Recently, the Reserve Bank of India released assorted surveys that broadly reflect the sentiments of producers and consumers. The sentiment about the current scenario seem subdued but there is an expectation that things may get better in the future.
Consumer confidence is dwindling
According to the consumer confidence survey report for the month of July 2020, the Consumer confidence is reported to have plummeted to its record lowest levels compared to March 2020 but the good thing is that the future expectations index (FEI), however, has again made it to the positive territory indicating signs of recovery for the year ahead. The movement of the two indices has been concurrent despite the gaps but the recent trend is that despite a sharp upturn in future expectation index, the current consumer confidence index is just not improving as of now.
The consumers’ perception in the field of prevailing economic situation, employment scenario and own income was significantly lower than that in May 2020. Though these results could be bothersome but they may not be surprising as the lock-down continues at many places and so economic activities may still take time to return back to normal. Most respondents reported reduction in discretionary spending.
*Both the CSI and the FEI are worked out as 100 plus Average of Net Responses of the respondents on the General Economic Situation, Employment Scenario, Price Level, Household income and Overall Spending.
Households’ Inflation Expectations Rise
Households’ median inflation perception has increased by 60 basis points in July 2020 in respect of current inflation as compared with the May 2020 survey round. However, Inflation expectations for both three months and one year horizons increased by 10 basis points each, over the previous round. Further, three months ahead median inflation expectation stood higher than that for one year horizon for the second consecutive survey round. An excerpt of inflation expectation (median) is given in the following chart:
If we analyse the product-wise expectations of prices for three months ahead we find that there is a steep fall in housing prices indicated. This may have multiple ramifications for the connected sectors.
An excerpt of Product- wise Expectations of Prices for three months ahead for the Survey period ended the month of June is given in the following chart:
Industrial outlook is bleak
On 7th August, RBI released the results of the 90th round of the Industrial Outlook Survey (IOS) conducted during April-June, 2020. The survey captures qualitative assessment of the business climate by Indian manufacturing companies for the first quarter of the current fiscal and their expectations for the following quarter.
As per the Survey, the manufacturing companies have assessed faltering of major demand indicators like production, order books and employment conditions in the first quarter of the current fiscal. Their perception of external demand conditions was also pessimistic. Further, their sentiment for overall financial situation was negative, largely due to downfall in internal accruals.
However, cost pressures due to interest payments on borrowings and purchase of inputs were assessed to soften and salary expenses also eased. But at the same time, the respondents polled reduction in selling prices and plunge in profit margins. No wonder, if the profit margins plunge in such a scenario, one can only assess that things are really bad as is aptly reflected by steep fall in the Business Assessment Index (BAI) to an all-time low at 55.3 in the first quarter of the fiscal 2020-21 from 102.2 in the previous quarter.
There is a silver lining seen in terms of the Manufacturers’ expectations about improvements in production and order books the forthcoming quarter. There is some optimism as regards the financial situation, but despite lower costs of material and labour, the profit margins may not improve much due to pressure on selling prices and weak consumer demand. These expectations are aptly reflected through increase in the business expectations index (BEI) to 99.5 for the second quarter of the current fiscal.
Each indicator is calculated as a weighted net response of nine business indicators, weights being the share of industry groups in gross value added (GVA). The nine indicators considered are: (1) overall business situation; (2) production; (3) order books; (4) inventory of raw material; (5) inventory of finished goods; (6) profit margins; (7) employment; (8) exports; and (9) capacity utilization. BAI/BEI gives a snapshot of the business outlook in every quarter and takes values between 0 and 200, with 100 being the threshold separating expansion from contraction.
Demand conditions in the manufacturing sector are showing signs of improvement
The results of the recent Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the quarter January-March 2020 provides a glimpse of demand conditions in India’s manufacturing sector. The capacity utilization has increased to 69.9 per cent from 68.6 percent in the preceding quarter but it was less than 76.1 per cent as achieved in the corresponding quarter a year ago. Although the number of respondents in this survey is much less than the preceding quarter yet the signs of improvement in manufacturing activity is a positive note in the pre-lockdown quarter’s OBICUS. However, the year on year growth was still in the decline mode.
Industrial Production is picking up in post-mass lock-down period
A large number of the industrial sector establishments were not operating from the end of March, 2020 onward. The recent release of the quick estimates of Index of Industrial Production for the month of June, 2020, however, has observed that industrial activity is resuming with the lifting of restrictions in the subsequent periods,. The Index for the month of June 2020 stands at 107.8 as compared to 53.6 and 89.5 for April 2020 and May 2020. Although the indices are still lower on year to year basis in almost all the sectors, yet it is but obvious due to covid19 related suspension of economic activity in many states during the month of June. So what seems more relevant is to look for post-covid19 trends so as to form an opinion about the whether the industrial production is picking up and it is observed that the things are getting better.
Rising food prices are a matter of concern
The all India general Consumer Price Index for the month of July, 2020 was 6.93 per cent compared to 6.23% in the preceding month. However, the Consumer Food Price Index stood at 9.62 per cent compared to 8.72 per cent in the month before. This is a matter of concern as the increase in expenditure of food expenditure may squeeze the portion of the net disposable income for non-food items as well as for savings or paying out for the debts. Other areas where the consumer prices have increased during this period are Personal care and effects (13.63 per cent) and transport and communication (9.95 per cent). The increase in retail inflation rate also may dampen the chances for future rate cuts by the Reserve Bank of India.
Indian economy needs a larger Stimulus
Many global outlook reports have predicted a far better growth rate for Indian economy in the coming fiscal. Many of the indices are also reflecting positive expectations for the second half of the current fiscal as well. There is a strong case for a booster dose of economic stimulus in the economy in view of prolonged time it has taken to move towards normalcy as the pandemic threat is not over as yet. It is a matter of reaching out to not only the people who have lost jobs but also to people who are seeking employment for the first time.
The recovery rate from covid19 infected patients is improving in a consistent manner on an average in India and so it makes sense to give another round of support to the manufacturing and other industries to come back on the track. The stock market indices have been indicating positive sentiment of investors. There is a need to be cautious about disconnect between the real economy and the financial markets. Therefore the approach should be to give booster dose to the sectors affected most by the pandemic rather than a blanket relief package which may create inflationary pressures in the times to come. The industry specific packages are thus the need of the hour.