Economy: Recovery continues but losing tempo; labour-intensive sectors still remain sluggish

The contraction of 1.6% in the factory output for January comes way below expectations, suggesting there are several pockets of frailty within the broader recovery. The slowdown was broad-based – both capital and consumer goods fared poorly. The bad news is that labour-intensive sectors of the economy remain sluggish. The Nomura India Business Resumption Index (NIBRI) fell to 95.2 for the week ending March 7 from 98.1 in the previous week with the gap from the pre-pandemic normal slipping to 4.8 pp from only 0.7 pp a fortnight earlier.

While the services sector is picking up — the February composite PMI was up at 57.3 from 55.8 in January — the loss of momentum elsewhere is a concern at a time when there is fresh surge of infections especially in key states like Maharashtra. A new round of lockdowns could slow the revival. Already, mobility indices were weak in the week to March 7; both the Apple driving index and the Google retail & recreation indices took a hit, though workplace mobility continued to improve.

Retail two-wheeler sales continue to be dull; between April 2020 and February, they have gone up in just one month possibly because vehicles have become expensive and unaffordable for some sections. While GST collections for January surpassed expectations, the generation of e-way bills has stayed more or less flat since October 2020. FAStag collections continue to grow at fast clip but possibly because of increased usage.

Loan growth while ticking up remains low at about 6%; importantly corporate bond issuances have come off sharply in January and February to levels of Rs 45,000 crore per month compared with the average for the March-December 2020 period. Pertinently, state-owned entities borrowing seem to be doing the bulk of the borrowing.

The performance of the core sector, for instance, continued to improve in January but at a slower pace; the increase was 0.1% month-on-month seasonally adjusted versus 2.2% in the previous months. Worryingly, construction-related sub-sectors are lagging the other sectors; agriculture is doing exceptionally well.

The demand for electricity, however, has been somewhat muted of late.

CMIE data show that at 6.9%, unemployment in February was lower than the average of 7.3% since July 2020; however, both the labour force participation rate (LPR) and the employment rate (ER) remain significantly lower than their levels before the lockdown and it could be a while before these move up to pre-pandemic levels. Also, the MGNREGA claims continue to rise even as the incremental person days work generated have remained high. This would suggest that many rural workers may not have got back their urban jobs.

Again, while exports have been showing an uptrend in the past couple of months, engineering goods, which bring in a third of non-oil exports, contracted sharply in February. Most critically, the recovery has been uneven in the sense that bigger companies have walked away with more while smaller businesses have benefited less. According to Crisil Research, less than 20% of 400 smaller companies (among ~800 listed ones) saw positive revenue growth in the first half of fiscal 2021 compared with 35% of the top 100 companies. The agency points out that credit growth has been the weakest for micro and small enterprises.