Mid-year stock-taking of the Indian economy

With two waves of Covid-19 largely behind us, it’s time to take a mid-year stock of Indian economy. We look at six parameters: exports, fiscal, growth, health, inflation and jobs.

Exports: Exports of traded goods have decidedly broken the $30-billion-a-month number: this trend has now persisted for the last six months since March. In this financial year till August, India has already exported goods worth $164 billion, a number that was achieved only by November in the previous year.

Admittedly, the last financial year had two months of lockdown (April and May); correspondingly, this year, April and May had the second wave of Covid-19 in India where the peak number of cases were 4X the first wave. This export growth comes at a time when global shipping and freight markets have been in a tizzy over the last few months as supply chain disruptions across commodities and final products reverberate across the globe.

India is benefiting from the ‘China+1’ strategy that many corporates have adopted and from the availability of shipping capacity, which remains choked in the Pacific. With schemes like the Production Linked Incentive Schemes (PLIS) kicking in, low corporate tax rates for manufacturing units, and revival in global demand, India seems well positioned to meet its FY2022 target of $400 billion of goods exports. This will be a structural break from the less than $350 billion number over the last decade.

Fiscal: The goods and services tax (GST) collections have consistently remained above the Rs 1 trillion-a-month mark since October last year, with a slight blip in June this year. The number of e-way bills (which represent only a part the goods portion of the goods and services tax) have risen back to 64 billion in July, which is the same level as between December 2020 and February 2021. Unlike in the case of exports that continued to remain strong in April and May, there was a dip in internal trade (due to partial lockdowns in various states) which reflected in the e-way bill numbers falling to 40 billion in May. Note that there is a healthy correlation between increasing e-way bills and GST collections.

Similarly, the direct tax collection numbers appear strong. The consensus profit after tax estimates for the companies listed on the stock exchanges suggest that profits in FY2022 could double from FY2021 levels—this will reflect in stronger direct tax collections also. With the government having a large leeway of 6.8% of GDP as fiscal deficit pencilled in, markets could be surprised positively on lower government borrowings, if revenue continues to remain strong.

Growth: The GDP growth number of 20.1% for Q1FY2022 generated a lot of flutter and excitement about base effects and the resilience of the real underlying growth. Even though median growth expectations for the full financial year, FY2022, have come down from double digits (forecast of 10.5% growth at the start of the year) to 9.5% now, these numbers indicate a strong, underlying economy.

India will be amongst the fastest growing nations of size, despite having been through a difficult phase of the second Covid-19 wave in the first two months of the fiscal year. If (a) the momentum on exports front continues, (b) the large fiscal space allows government to spend and invest more, and (c) the recent large fund-raising boom in the capital markets leads to increased investments, overall near-term economic growth could surprise on the upside.

Health: Vaccinations have been a bright spot for India. With a vaccination roll-out exceeding 10 million doses a day consistently, India has now completed more than 700 million doses. At this pace, India could reach a billion doses before the festival quarter kicks in from early October. With the 84-day window for the second dose of Covishield now coming up, expect the number of fully inoculated population to go up significantly from 17% currently. New supply of vaccines via increased capacity and approval of new vaccines is coming in.

Given the efficacy of vaccines, the possibility of a severe third wave is hopefully lower. With no let-up in daily testing numbers (stable at around 2 million a day) and state health infrastructure more prepared, the macroeconomic disruption of any such wave might be significantly contained.

Inflation: Globally, central bankers have been surprised on the upside with inflation. Consumer price inflation prints of 5%-plus have been unknown in the US for most of the 21st century. Central bankers, especially across the developed world, expect this phase of inflation to be ‘transitory’ as supply chain disruptions are resolved. However, some central banks are beginning to take note of the possibility of a sustained inflation. In India, the consumer price inflation (CPI) has been skirting near the 6% mark since the start of the pandemic.

India’s flexible inflation targeting regime mandates the central bank to keep the inflation to 4% (+/-2%). The US now has an ‘average’ inflation target while India has a band. RBI’s fan chart of inflation, released after its last monetary policy committee meeting, suggested that there is a reasonable probability of breaching the 6% inflation mark over the next few quarters. The prints of this metric will substantially decide the course of the accommodative monetary policy of RBI.

Jobs: Various datasets, whether the Periodic Labour Force Survey (PLFS) or the Centre for Monitoring of the Indian Economy (CMIE), show that employment, especially the informal workforce, has been impacted by Covid-19. When an economy goes through a sudden and sharp contraction, as happened in the last year, it is bound to have an impact on jobs. As the economy now comes back on steam (India should reach beyond pre-Covid-19 levels of GDP sustainably by Q3FY2022), jobs should start to come back. Coupled with inflation, employment is an important social and political indicator. Expect policymakers to focus on these over the next few quarters.

The author is with the National Investment and Infrastructure Fund (NIIF). Views are personal