India economy review!
Last updated: 11 Jan, 2021 | 11:13 am
GDP first advance estimate for FY21
- The government has estimated that India's real GDP will decline by -7.7% in Apr-Mar 21 period. This is in-line with RBI’s forecast of -7.5% in FY21.
- Barring agriculture (3.4%) and electricity (2.7%), all the other sectors are estimated to record a fall in Gross Value Added in FY21. Notable fall is expected in trade, hotels, transport, storage and communication (-21.4%), construction (- 12.4%) and mining and quarrying (-12.4%), as per the government’s estimates. Indian economy is formally in recession with GDP growth contracting in two consecutive quarters.
- However, high frequency indicators have shown a rapid pace of normalisation in Q3FY21 supported by pent-up demand and festive demand. This normalisation in economic activity is likely to continue in the last quarter of FY21 amidst moderation in the number of Covid cases and considerable optimism on roll-out of the vaccine.
GST Collections hit record high
- Total Goods and Services Tax (GST) collections in Dec 2020 reached an all-time high of ₹1.15 lakh crore in Dec-20. This is the third consecutive month in the fiscal year that GST collections have crossed the ₹1 lakh crore mark.
- The collections have been higher, indicating that the economy is slowly coming out of Covid-19 related disruptions driven by festive season sales in November and restocking by retailers ahead of Diwali festivities. GST for November transactions is collected in December.
Manufacturing PMI remains stable, Services PMI slows down
- A PMI number below 50 indicates a contraction in business activity month over month, while a point above 50 indicates growth.
- The IHS Markit India Manufacturing PMI remained stable at 56.4 in Dec-20 from a decade high of 58.9 last month. The stability in the number reflects the loosening of Covid-19 restrictions, strengthening demand and improved market conditions. Factory orders too increased during the month.
- In case of Services, the number eased to a 3-month low of 52.3, as competitive pressures and continuing negative impact of the pandemic weigh. Uncertainty surrounding the pandemic, rupee depreciation and inflationary pressures curbed sentiment.
Core sector output declines marginally in Oct-20
- The table below shows the contraction in output for eight core sectors — coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity. This is a leading indicator of the monthly industrial performance.
- Output contracted by 2.55% YoY in Nov-20, as compared to marginal decline witnessed in the month of October (-0.9%). The core sector output data is a crucial macroeconomic data, indicating the health of the economy as it constitutes over 40% of the index of industrial production (IIP). Cumulatively, April-Nov growth is (-)11.4%.
- The economy is yet to fully recover from the impact of the lockdown imposed in the wake of the pandemic. Crude Oil (-4.98%), Natural Gas (-9.32%), Refinery Products (-4.89%), Steel (-4.39%) and Cement (-7.16%) have seen on-year declines in the month.
A full-blown recovery in Core Sector output seems to be at least a few months away, as demand remains subdued.
Retail inflation eases, but remains above RBI’s tolerance band
- Retail inflation for November 2020 was at 6.9%. There has been an easing in retail inflation on a month on month basis, aided by the moderation in food inflation.
- However, it has remained above the 4% inflation target of the RBI for over a year while breaching its upper tolerance level of 6% for 8 months in a row.
- The outlook for inflation has turned adverse relative to expectations in the last two months. CPI inflation is projected at 6.8% for Q3FY21, 5.8% for Q4FY21 and 5.2% to 4.6% in H1FY22, according to RBI.
- The numbers indicate that the economy is on the road to recovery, though a full-blown recovery seems to be at least a few months away.
- The advanced estimates of GDP have come in better than expected, after the marginal recovery seen in Q2 GDP. While this is an indication of sustained recovery, festive season and the supply side push helped the ailing economy. Unless we see efforts to revive demand, this could be under threat.
- Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
- Stick to AAA-rated low duration funds and bonds over high duration funds, and long-maturity bonds as yields will remain volatile in the near future but in the medium term (2-3 years) the rate cycle is expected to bottom out and move up.