Indian economy: Long road to recovery

Indian economy: Long road to recovery

Last updated: 05 Aug, 2020 | 03:12 pm

Indian economy: Long road to recovery

IIP Contraction Slows in June

  • The contraction in industrial output slowed in June compared to the previous months, indicating the improvement in economic activity as lockdowns ease in various states across the country.
  • The Index of Industrial Production contracted by 16.6% in June over last year, compared to a contraction of 34% in May. The gauge had fallen by a record 57.6% in the month of April-20, after the lockdown imposed crippled economic activity in the month.

Manufacturing PMI slips, after sharp rebound in July

  • The India Manufacturing PMI (Purchasing Managers’ Index) is an index comprising New orders, manufacturing output, employment, supply time and stock in manufacturing.
  • 'India's manufacturing sector which made a smart recovery towards stabilisation in June, slipped marginally in July, reflecting the impact that localised lockdowns are having on manufacturing activity. Various state governments had imposed lockdowns on an ad-hoc basis in July, hampering manufacturing activity'
  • This index is a widely regarded gauge on the manufacturing industry and business optimism. The July PMI slipped to 46 from 47.2 in June. 
  • While there has been a marginal decline, the number is well above the record lows of 27.4 seen in April, and the outlook remains positive
  • A PMI number below 50 indicates a contraction in business activity month over month

GST collections remain healthy

  • GST collections remain healthy, with ₹87,422 crore mopped up in July. While it is slightly lower than ₹90,917 crore in June-20; GST collections are back at about 85-90% of collections Pre-Covid
  • “GST collections were higher in the previous month of June-20, as a large number of taxpayers had paid taxes pertaining to previous months of February, March and April 2020, after the government had provided a relief period.”

Core sector output decline slower than May

  • 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 15% YoY in June 2020 slower than the decline in growth of 22% YoY seen in the previous month of May-20” 
  • The lockdown imposed in the wake of the pandemic has hit production activity across various industries. In fact, the YoY decline in Coal Sector has been worse in June-20 than seen in the previous month of May-20. 
  • However, all other sectors are on the road to recovery. Steel (down 33.8%), Coal (down 15.5%) and Electricity (down 11.1%) have more catching up to do.

 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.

Auto sales data

  • Two-wheeler sales have seen an encouraging trend in the last three 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 rose for the third straight month to cross 5-lakh units in July. In fact, for HeroMotocorp the sales have reached 95% of pre-Covid levels
  • 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.

For Bajaj Auto, while the domestic sales have reached about 80% of pre-Covid levels, the exports continue to suffer, as supply chains continue to remain disrupted in various parts of the world. The exports are at about 50% of pre-Covid levels.

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 the manufacturing activity had seen a sharp improvement in the previous month of June, ad-hoc lockdowns have hampered recovery in July. However, the Core Sector data points look optimistic 
  • 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 shut downs 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.

Reach out to your family wealth office to help you navigate these tough times.