Early indicators signal sustained demand revival, but analysts sound caution

A revival of demand seen in September apparently gathered further steam in October, with a surge in certain early high-frequency indicators, such as manufacturing PMI, power generation, auto sales and rail freight, and even fuel sales (see chart).

This lends some credence to the notion that the economy may be healing faster from the Covid-induced shock than anticipated earlier. But many analysts caution that the durability of the current rebound, seemingly aided by spillover of pent-up demand post-lockdown, can be established only if the momentum outlasts the festive season.

Even after it was clear that September saw release of considerable pent-up demand, the Reserve Bank of India has estimated a contraction of close to 10% of the gross domestic product (GDP) in the second quarter. Many analysts have also noted that a surge in demand from the rural sector, which is boosting the sales of a section of Corporate India and MSMEs, may not suffice to fully offset the impact of a continued stagnation in composite urban demand.

It is still early to gauge the impact of the modest stimulus measures taken by the government and the steps taken by the RBI to spur growth, including a boosting of liquidity support for financial markets and credit flows to specific sectors like MSMEs and high net-worth consumers.

If optimistic commentators are to be believed, manufacturing firms’ capacity utilisation might recover in Q3, yet few would bet on private investments. Exports could remain anaemic too, given the torpid external demand.

“A modest recovery in various high-frequency indicators in September could strengthen further in H2, with progressive unlocking of economic activities, RBI governor Shakthikanta Das had earlier said, adding a predominantly “three-speed recovery” might be in the horizon, with individual sectors showing varying paces. Among the resilient brisk-movers are agriculture and allied sectors, FMCG, passenger vehicles, tractors, two-wheelers, drugs and pharmaceuticals and electricity generation, he said.

Manufacturing activity, as measured by the Purchasing Managers Index (PMI), scaled its peak in more than a decade in October, having recorded a third straight monthly improvement. Manufacturing output touched a 13-year high, while sales, too, improved dramatically.

Electricity generation, a close proxy for economic activities, rose for a second straight month in October, registering a 12.1% year-on-year (y-o-y) rise, against 4.6% in the previous month.

Diesel consumption in October rose 6.6%, the first y-o-y increase since Covid-19 restrictions were imposed in late March. Diesel sales, which account for about two-fifths of India’s fuel demand, surged by as much as 27.5% last month from the September level.

Railways freight earnings as well as loading saw a significant rise in October. While the loading jumped by 15% on year to 108.16 million tonne, freight earnings for October grew 9% to `10,405 crore.

Wholesale auto sales, too, zoomed in October, driven by festive demand. Factory despatches by carmakers, including Maruti Suzuki India, Hyundai Motor India, Mahindra and Mahindra and Honda Cars India, suggest the industry has recorded a 17% y-o-y increase in October, the third consecutive month of growth. As for two-wheelers, Hero MotoCorp posted an impressive 35% y-o-y jump in domestic sales in October, while Bajaj Auto recorded a rise of 11% and TVS Motor 19%.

Mumbai’s residential sector recorded its highest monthly registration in eight years in October. As many as 7,929 units were registered in October, recording a jump of 42% month on month and 36% y-o-y, showed the data by Knight Frank India.

Mirroring the improvement in leading gauges, the Nomura India Business Resumption Index improved to 82.4 in October, a rise of 2.6 points from 80.3 in September and 73.6 in August.

“However, it remains to be seen whether this momentum outlives the festival-led activity surge. We also remain cautious on the potential reversal of pandemic gains in November-December, as the festive season draws down,” Sonal Varma and Aurodeep Nandi of Nomura said in a report on Monday.

Before the latest surge, several indicators had shown signs of rebound in September as well. Bloomberg News reported recently that five of the eight high-frequency indicators, including exports, tracked by it improved in September, while three were steady; both domestic and overseas demand helped the recovery in September, it added.

A finance ministry report for September recently said the economy was on a recovery path and the festive season might add to the momentum. However, it conceded that the sustained spread of the Covid-19 virus poses a downside risk to short-term and medium-term growth rates.