India economy update: Aug-2020

India economy update: Aug-2020

Last updated: 01 Sep, 2020 | 02:27 pm

India economy update: Aug-2020

Manufacturing activity expands for the first time in 5 months

  • India's manufacturing activity showed a healthy rebound in August-20, as lockdown curbs eased in various parts of the country
  • The India Manufacturing Purchasing Managers’ Index rose to 52 in August compared with 46 in July. The Manufacturing PMI (Purchasing Managers’ Index) is an index comprising New orders, manufacturing output, employment, supply time and stock in manufacturing. This index is a widely regarded gauge on the manufacturing industry and business optimism. 
  • The manufacturing activity has shown a robust pick-up, as the PMI has recovered from record low levels of 27.4 seen in the Month of April-20. “The upturn in PMI was led by an improvement in customer demand as client businesses reopened after lockdown restrictions eased amid the COVID-19 pandemic”
  • A PMI number below 50 indicates a contraction in business activity month over month, while a print above 50 indicates growth

Core sector output decline slower than June (in July)

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.

  • “The eight-core industrial output contracted by 9.6% YoY in July 2020 slower than the decline in growth of 12.2% YoY seen in the previous month of June-20”.  
  • The lockdown imposed in the wake of the pandemic has hit production activity across various industries. In fact, the YoY decline in Refinery Products (-13.90%) and Cement (-13.50%) has been worse in July-20 than seen in the previous month of June-20. 
  • However, all other sectors are on the road to recovery. Steel (down 16.4%), Natural Gas  (down 10.2%) have more catching up to do.
  • Fertiliser production grew 6.9%, faster than 4.2% in June on the back of high demand from agriculture along with replacement of stocks in advance for rabi sowing in October-November.

A full-blown recovery in Core Sector output seems to be at least a few months away, as demand remains subdued, and lockdowns continue in various parts of the country

Q1 GDP sees first contraction in 40 years

  • India’s GDP contracted 23.9% YoY in Q1FY21, as lockdowns imposed to control the spread of Coronavirus pandemic curtailed economic activity
  • ‘As expected, this is the worst GDP contraction witnessed in at least 40 years, and also the first GDP decline since India began publishing quarterly GDP numbers in 1996’
  • The fall is mainly on account of a 47% on-year decline in Trade, hotel, transport, communication, as most of the industries in this sector remain shut in April and some part of May. Construction (-50%), Manufacturing (-40%), Mining & Quarrying (-23.3%) were the other sectors that saw major contraction

Auto sales data

  • Two-wheeler sales have seen an encouraging trend in the last four months, recovering rapidly after a washout in domestic sales in April (Bajaj Auto exported ~37,800 units in April)
  • 'Leading the path of rapid recovery, Hero MotoCorp’s sales have now surpassed pre-Covid levels with robust volumes of 5.84 lakh in August, registering a YoY growth of 7.5% in Aug-20.' Hero Motocorp remains the largest two-wheeler manufacturer in India with more than 44% market share. Bajaj Auto, the second largest firm by market share, is yet to report sales data for August-20
  • Nearly half of Hero’s domestic sales comes from rural India. A good rabi crop forecast points to improving rural incomes, which should benefit the firm. A combination of multiple factors, including the forecast of a normal monsoon, a bumper Rabi crop and the upcoming festive season are expected to keep the momentum going over the next few months.
  • While 4-wheeler sales had remained subdued in the past few months, Maruti Suzuki India posted a 17.1% on-year rise in total sales to 1,24,624 units in August-2020. 
  • Interestingly, Escorts Ltd posted a 80.1% YoY rise in sales to 7,268 tractors, its highest ever August sales against 4,035 tractors sold in August 2019. 
  • The timely arrival of the south west monsoon, combined benefits of a record Rabi crop, Government support for Agri initiatives and very good progress in the sowing of the Kharif crop have led to positive sentiments in the rural areas

INDmoney Analysis

  • The numbers indicate that the economy is limping back to normalcy, though a full-blown recovery seems to be at least a few quarters away.
  • While Apr-Jun GDP has seen a massive hit, economic data in June and July show green shoots of recovery
  • As the lockdowns have eased, the manufacturing activity has expanded for the first time in 5 months. The Core Sector data too showed promise in July, pointing towards a recovery
  • The initial signs of pick up as the economy started to reopen are positive. While companies are laden with debt and the financial sector will take a hit, there is still demand in the economy.
  • However, with the spread of COVID gaining pace across the country, further shutdowns continues to be the biggest factor to impede recovery
  • 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