India / Early data hints green shoots in Indian economy, Has it bottomed out?

Initial high-frequency indicators for December 2019 suggest some sort of revival in the Indian economy. The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit has increased to 52.7 in December 2019, the highest since May 2019. Goods and Services Tax (GST) collections were above Rs 1 lakh crore for the second consecutive month in December. Auto companies such as Maruti Suzuki have reported a rise in domestic car sales. Centre for Monitoring Indian Economy’s (CMIE) capex database shows that new investment announcements have posted a positive growth in the December quarter, the first since June 2018. Are these signs that the Indian economy will finally break from six quarter growth deceleration in the December quarter?

The RBI’s Monetary Policy Committee (MPC) in its December meeting had expected GDP growth to start a recovery in the second half of the current fiscal year. The MPC had projected GDP growth in the second half to be in the range of 4.9%-5.5% against 4.8% between April and September last year. It is better to wait for some more time before concluding that the worst is over the Indian economy.

While the manufacturing PMI has increased for the third consecutive month, it’ll be interesting to see whether the services PMI also shows this trend. A PMI value greater than 50 signifies expansion in economic activity in these sectors. Both these indices were greater than 50 in November 2019, while the manufacturing PMI has not gone below 50 since July 2017, the month when GST was rolled out.

Yet, manufacturing component of the Index of Industrial Production (IIP) has shown negative growth for three consecutive months up to October, 2019, the latest period for which data is available. Even in November 2019, core sector index, which comprises of coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity, contracted for the fourth consecutive month.

These two indices suggests that a revival in industry component of GDP is either unlikely or would be extremely muted in the December quarter. However, the process might have begun, as is shown by the consecutive rise in manufacturing PMI. A higher services PMI however could lead to some job-creation and hence rise in disposable incomes in the economy.

Tax experts who spoke to HT attributed the rise in GST collection to government efforts towards ensuring better compliance and plugging leakages (see https://bit.ly/2QdI06y for details). Still, they admitted that while compliance and other factors have definitely boosted collections, a 16% growth in revenue collections from domestic transactions shows that deceleration in economic activity has been halted, if it isn’t moving upward yet. GST is a tax on consumption, and an upward movement in revenue collection, is not without any basis , a senior government official said on condition of anonymity. To be sure, the government will still have to collect Rs 3.5 lakh crore in the remaining three months of the fiscal year to meet its GST target.

Kerala finance minister Thomas Isaac tweeted, “It is a laughable conclusion that slowdown may have bottomed out because GST revenue crossed ₹1L cr. It is due to suo moto revisions along with annual returns,limits imposed on input credit claims and penal blocking of e-way bills.A lone sparrow doesn’t make it spring.#GST”

He, however, clarified to Hindustan Times his comments on the economic recovery is limited to the GST revenues of last two months. “I’m not saying that there is no green shoot. But, this cannot be due to the GST (alone).” Isaac says collection has improved because of better compliance, tightening of the GST administration and efforts to plug tax evasions.

One such green shoot is sales of automobile companies such as Maruti Suzuki. The total domestic car sales numbers are, however, not out and are expected next week.

Mahantesh Sabarad, head of retail research at SBI Caps Security, said that two factors need to be taken into account in understanding the growth in car sales, a low base in the corresponding period last year and a surge in demand due to the introduction of BS-VI vehicles in April 2020. While there are many customers who will be looking to buy newer models when they are launched, some may actually be keen to buy the older ones at a bigger discount, he added.

As for capex announcements, a Mint story by Surbhi Bhatia today uses the CMIE database to show that the recovery is new capex announcements in December is not broad based, and is mostly driven by two projects; Indigo buying new aircraft and expansion of Reliance’s Jamnagar refinery (see https://bit.ly/37n0GGK for details).

Which is why the answer to the original question depends a lot on the PMI numbers out Friday, and the IIP numbers out later.