The panoramic view of the Indian economy has improved. The release of three bits of data led to a sharp rally in the financial markets last week: a further decline in inflation, the first forecast of a normal monsoon and a small rise in the index of industrial production.
The optimism based on macro data has attracted more attention, but a few market analysts had already been talking about signs of a demand recovery based on micro data. Consider:
Jobs: The Naukri Job Speak Index of hiring firm naukri.com, for instance, showed that hiring activity in March was up 22% on a year-on-year basis after recording an increase of 18% in the previous month. Although a rise in job listings on a particular portal may not reflect the complexity of the labour market in India, it does indicate some pick-up in activity.
Auto sales: The recently concluded financial year was one of the best in recent times for cars and commercial vehicles sales. While cars recorded the highest sales growth in five years, an indication of improvement in consumer confidence, the numbers for commercial vehicle sales—a lead economic indicator—were even more encouraging. Overall growth of 11.5% in commercial vehicle sales during the year, compared to a decline in sales in the past few years, is being viewed as a signal of a pick-up in commercial and infrastructure activity.
Cement: The sharp growth in cement dispatches in the past couple of months corroborates this hypothesis. In fact, cement producers have also been able to raise prices in certain markets. A lot of this could be related to the acceleration of the roads programme and the more general increase in public investment.
Other indicators: Other indicators such as rise in electricity generation, growth in consumption of petroleum products and pick-up in bank credit can also be seen as hints of improvement in economic activity on the ground.
However, even as select economic indicators are showing encouraging signs, they should be read with caution as it may still not be safe to conclude that a full-fledged economic revival is underway. On a number of occasions in the past, some indicator or the other has shown signs of life for some time, but the momentum eventually fizzled out due to lack of support from other parts of the economy.
A closer look at bank credit data, for instance, shows that the flow is much stronger in favour of consumers, and growth in advances to industry continues to remain sluggish. This is possibly because banks are struggling with asset quality issues and do not want to increase exposure to industry at this stage. However, it is also likely that a section of industry is in no hurry to increase capital expenditure because of spare capacity.
So, can consumption demand alone help revive economic growth? To be sure, another boost is likely to come in with the implementation of the pay commission recommendations. While this will be positive for consumption, it may not be sufficient to compensate for slower investment demand, which was the primary source of rapid growth in the boom years of the past decade.
Also, even as some indicators are showing signs of a turnaround, they are not sufficiently broad-based yet. For instance, while the past financial year was good for cars and commercial vehicles, demand for two-wheelers remained relatively subdued. Further, while consumption of petroleum products has increased, non-oil imports—an indication of demand, particularly investment demand, in the economy—remains depressed. Slower global growth is also a drag for economic activity as it is affecting exports and employment in exports-oriented sectors.
A good monsoon will help overall economic growth with higher agricultural production and possible revival in rural demand, which has suffered in the past two years because of deficient rainfall. It is also possible that higher farm output will result in lower food price inflation, help anchor inflationary exceptions, and open up space for further monetary accommodation. But it still remains to be seen if this can give a decisive push to what is still, at best, a nascent and fragile economic recovery.
Is the Indian economy witnessing a full-fledged recovery?
