India’s economic report card coloured in red

The Indian economy's report card continued to disappoint in October, with most indicators of economic activity flashing red, shows the latest edition of the Mint Macro Tracker.

The tracker, launched in October last year, provides a monthly state-of-the-economy report based on trends across 16 high-frequency economic indicators. In October, 10 of the 16 indicators were in red (below the five-year average trend). This was the fifth month in a row when half or more of the sixteen indicators were in red. Only five indicators were in green (above the five-year average trend) for the latest month, while one maintained the trend.

The latest reading shows a sharp deterioration from six months ago, when seven indicators were in red and seven in green. The deterioration looks even worse when compared to a year ago, when only six indicators were in red, while nine were in green.

All four variables of the consumer economy—passenger vehicle sales growth, broadband subscriber growth, tractor sales growth and domestic air passenger growth—were in red for the ninth successive month in October. The decline in passenger vehicle sales— which has come to represent the consumption slowdown-- was less severe in October compared to a month ago. In fact, it was the smallest decline in the last six months. However, that does not seem to have brought much cheer as other parts of the consumer economy remain subdued.

"Even as some indicators such as retail auto sales have somewhat improved, we are wary of trying to identify green shoots yet given the breadth of the slowdown, and with some key headwinds persisting," said an ICICI Securities Primary Dealership report dated November 13. "…Tighter credit conditions would continue to weigh on any demand revival, and this would also have negative spillovers," it said.

The consumption slowdown has also taken a toll on the producer economy, with all four indicators—Purchasing Managers' Index (PMI) composite, core infrastructure sector growth, banks' non-food credit growth, and rail freight traffic growth — in the red. The PMI composite index (which reflects private sector activity across manufacturing and services sectors) showed a decline (a reading below 50) for the second consecutive month in October. Core sector growth (an index of eight key industries) declined 5.2 percent in September, the latest month for which data is available. Non-food credit growth also fell to slowest rate in 23 months in September, the data shows. The weekly data on credit growth released by the central bank suggests that non-food credit growth continued to be tepid in October. This estimate for October is only a rough estimate based on comparisons of weekly figures since monthly figures have not been published yet.

"We believe bank lending conditions are likely to stay tight given still high NPA's and risks from exposure to NBFC's that continue to face difficulty in accessing credit in local markets," the afore-mentioned ICICI securities report said.

Earlier this month, the ratings agency, Moody's Investors Service warned that a prolonged credit squeeze among India's lenders may worsen, as it downgraded India's outlook to 'negative' from 'stable'. Since then, the central bank has stepped up efforts to stem the rot in the shadow banking sector, which has been at the heart of the credit squeeze in the economy over the past year. RBI has also been cutting rates since February, and is widely expected to continue to do so in the next monetary policy meeting on December 5 even as economists begin to question the efficacy of the rate cuts. The inflation overshoot in October to 4.6 percent, beyond the central bank's medium term target of 4 percent, complicates matters further. The latest reading has raised the spectre of stagflation after a long time, and could limit rate cuts in future.

The only silver lining in India's report card lies on the external front. In October, India's trade balance (as a share of total trade) improved, while labour-intensive exports maintained above-average trend. Rising fund flows helped strengthen the exchange rate and India's import cover also saw an improvement. As a result, India's external metrics look less vulnerable than they did a couple of months ago. However, it is worth noting that the improvement in the trade balance has largely been on account of a reduction in imports rather than a pick-up in exports, which mirrors the weakening momentum of the domestic economy.

Given that several other emerging markets are also going through a tough phase, India's relative attractiveness among emerging markets appears high, as these pages have highlighted earlier. However, it remains an open question how long the relative attractiveness remains, given the weakening domestic momentum.