Slack, recovery and overheating: Indian economy has it all

What is the state of the Indian economy? That depends on which part of the economy we are looking at. It also depends on the lag in availability of relevant data. On the basis of the latest statistics, there is no unambiguous answer.

There are parts which show that things, and more importantly, sentiment, are still worse than what they were before the Covid-19 pandemic struck. But there are also indicators that are in the green and stakeholders who are extremely bullish. There are sectors showing a sustained recovery, almost in sync with the dropping trajectory of active Covid-19 cases in the country. These diametrically opposite situations and sentiments face a common problem – cost-push inflation and shortages in international value chains, both of which can generate strong headwinds to growth.

A wide gap between consumer confidence and investor confidence

Results of the September round of the Consumer Confidence Survey (CCS) of the Reserve Bank of India were published on October 8. The Current Situation Index (CSI) was at 57.7. CSI is calculated by adding 100 to the average of net responses (difference between share of respondents who reported an improvement and deterioration) of general economic situation, employment scenario, price level, household income and overall spending.

A CSI value below 100 implies the share of respondents who reported an improvement was less than those who reported a worsening. To be sure, the September CSI value is the highest since the July 2020 round of CCS. However, it is still lower than the May 2020 reading of 63.7. CSI has not been above 100 since March 2019, which was a one-off spike after consecutive below 100 readings since June 2017. These numbers highlight the underlying, perhaps entrenched weakness, on the demand front in the Indian, or urban Indian, economy. CCS is only carried out in 13 major cities.


Not everyone is bearish about the Indian economy. Take stock markets, for instance. While the Indian economy is not expected to regain pre-pandemic levels in the first half of the current fiscal year, stock markets remain at a record high. The bull run in stock markets is not just about the formal part of the economy – whose shares are listed in such markets – doing better. There is also a large degree of optimism about the future, which is evident when one compares the price to earnings (PE) multiple for major stock markets in the world. The PE multiple captures the price of a share as a multiple of earnings; the higher the value, the greater is the belief that it will generate higher earnings in the future.

The divergence in investor confidence in stock markets and consumer confidence is a good indicator of the class divide in the perception of the Indian economy.

The divergence in blue-collar and white-collar incomes

Not all the optimism in stock markets is exuberance. The formal sector, especially its white-collared component, has made an impressive recovery. This is best seen in the latest direct tax numbers, not just corporation tax (levied on profits) but also income tax (levied on salaries).

Data from the Controller General of Accounts (CGA), which gives tax numbers until August, shows that direct tax collections have recovered strongly and are significantly above pre-pandemic levels in nominal terms. On the other hand, data on rural wages – the best proxy for wages of unskilled labour in India – until July, the latest available, shows growth compared to pre-pandemic levels has been much lower.

This comparison shows that the trajectory of white-collar and blue-collar incomes is very different in the Indian economy. It is important to understand that most high-frequency indicators of the economy are driven by formal sector indicators, whereas the stress in the informal sector takes time to reflect in economic statistics.


Double-digit inflation expectations and hardening supply side constraints

India’s carmakers are facing a unique problem. While orders are showing an improvement, they are actually having to trim production. According to an ICICI Securities research note dated October 10, “The auto industry witnessed ~32% QoQ improvement in wholesale despatches in Q2FY22” even as “an increasing number of Original Equipment Manufacturers (OEM) declared production cuts (20-40% demand) despite strong demand.” The note mentions shortages of semiconductor chips and elevated logistics costs as major factors holding back supplies.

The shortage in production and rising costs comes at a time when inflation expectations are close to their all-time high in India. While headline retail inflation, as measured by the Consumer Price Index (CPI), fell to 5.3% from 6.3% between June and August, median inflation expectations remained elevated. All three measures – current, three months ahead and one year ahead – were in double digits. These are very high levels historically.


With prices of crucial commodities such as crude oil continuing to rise – Brent crude was at $84.23 on October 11 – there is unlikely to be any relief on inflation.

A note by Nomura Global markets research suggests that the disruption in global value chains and price pressures might compromise potential gains from exports for Asian economies. “Asian exporters are currently dealing with a problem of plenty. Too strong demand and rolling global supply chain bottlenecks have hobbled their orders and sent freight rates soaring. While supply bottlenecks are a short-term hurdle and tech demand still looks strong, we see storm clouds on the horizon, due to spill over effects from a slowing China and a normalization of goods demand in Western economies, especially the US. In our view, the export cycle has peaked, and a slowdown is likely to materialize next year,” the note said.

India’s policy choices during the pandemic prioritised ensuring that the formal sector did not run into problems (by ensuring credit guarantees and liquidity infusion) rather than boosting demand directly (by supporting incomes in the informal sector). The bet could have paid off had the disruption in global value chains and commodity price inflation not emerged as a big disruptor for formal sector activity.

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