High frequency indicators suggest that economic momentum is sustaining, even as pain points remain
The Indian economy grew at a healthy 7.8 per cent in the first quarter of the ongoing financial year. Going by the high frequency indicators, the economic momentum has continued in the weeks and months thereafter, and may sustain due to the impetus from spending during the festive season.
In the latest state of the economy report, economists at the Reserve Bank of India also express optimism, pegging growth at 6.8 per cent in the second quarter, marginally higher than expectations. This is good news.
The report presents data on a plethora of economic indicators to make its case. These point towards a sustained momentum. For instance, the purchasing managers index for manufacturing and services continues to remain in expansionary mode. Sales of automobiles show an uptick, driven by the three-wheeler segment. Steel consumption is up almost 18 per cent, while cement production has risen by almost 19 per cent, indicating robust construction activity. Residential real estate markets across the country are witnessing a steady growth momentum even as interest rates remain high and property prices surge. Toll collections have expanded by a healthy 20 per cent and both air cargo and railway freight have registered high growth. Alongside, the unemployment rate has declined further in both rural and urban areas.
However, pain points remain. Exports continue to contract, signalling sluggish global demand. There are few signs of a broad-based pick-up in the investment cycle even though the corporate sector is in much better financial shape.
And while the labour force participation rate has edged upwards, especially for females, there has been a concomitant increase in self-employment, indicating that the economy is perhaps not being able to create enough high quality jobs for the millions entering the labour force. Demand for work under MGNREGA remains higher than last year, and above pre-pandemic levels. Some FMCG companies have in fact pointed out in their quarterly results that rural demand remains under pressure, and continues to lag the urban market. Alongside, the sharp rise in household borrowings has also raised concerns.
Data from the RBI shows that household financial liabilities rose from 3.8 per cent of GDP in 2021-22 to 5.8 per cent in 2022-23. While part of the credit has been used to finance purchase of houses and vehicles, some have argued that this surge in borrowings is also indicative of growing financial distress. In any case, there are limits to debt-fuelled consumption. Any slowdown in credit will have implications for the growth momentum in the wider economy.