How to read the state of the economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trailing indicators

Mains level : Paper 3- Indicators to look at to get the state of economy

Context

GDP growth estimates range from a high of 11 per cent, as per the government, to 9.5 per cent as per RBI. The variation is stark. So, what should one look at to evaluate the state of the economy?

Things to consider while evaluating the economy

  • First, since the economy contracted by 7.3 per cent in 2020-21, all numbers will be exaggerated in the upward direction.
  • Second, beware of interpretations based on single-month data.
  • Cumulative numbers are better at times, but can be misleading too.
  • Third, what is more important is how things will play out during September-December as this is the festival-cum-harvest season which engenders spending normally.
  • Several indicators are used as leading signals of the economy, but here, too, we need to be careful.
  • PMIs for manufacturing and services tell us if we are better off than the previous month.
  • But that is not how data is normally presented as we usually talk of year-on-year growth.
  • But it is an early signal for sure. The IIP and core sector numbers will be influenced by base numbers and come with a lag.

Indicators to look at as signs of recovery

  • Credit growth: Bank credit is a good indicator of whether companies are producing more as all activity requires working capital.
  • Here, the picture is not good as growth is (-) 0.4 per cent as of July end, indicating that activity has not picked up yet.
  •  Therefore, credit growth is in the negative territory.
  • Investment:  Debt issuances are lower in the first four months at around Rs 1.25 lakh crore, which is half of the Rs 2.57 lakh crore mobilised last year.
  • Therefore, the investment scenario is still one where companies are watchful.
  • There is surplus capacity in industry with utilisation rate being at 69.4 per cent in March 2021.
  • Rural demand: Rural demand is an integral part of the story and presently progress on the kharif crop is satisfactory.
  • A good crop is also necessary to generate spending power besides augmenting supplies in the market as well as food processing industry.
  • The second wave has pushed back rural households with more expenditure on health care.
  • Employment generation: Employment generation is a trigger for higher income and spending and while the battle between CMIE and EPFO data remains unresolved, the market will finally reveal if people have more money.

Inflation concern

  • Inflation is high and though there is a view that it is transient.
  • Several households, who are living on a fixed income have witnessed a double whammy in the form of lower returns on deposits and cumulative inflation of 6 per cent last year, and a similar number this year.

Conclusion

Investment will trail consumption and while the Centre has a good capex plan, it is only one piece in the overall puzzle. The private sector must get involved and with the banks being hesitant, the road can get longer.

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