Indian economy seems to be on the road to recovery in 2020

A Bloomberg gauge of animal spirits showed activity accelerating for a second month, with most of the 8 indicators holding their ground last month.

Illustration by ThePrint Team

Mumbai: A sharp pickup in India’s business activity in January signaled momentum returning to Asia’s third-largest economy, although a strong recovery still looks unlikely as consumer demand remains subdued.

The dial on a gauge measuring so-called animal spirits showed activity accelerating for a second straight month, with most of the eight high-frequency indicators tracked by Bloomberg News holding their ground last month. The needle moved to 5 from 4 in December.

“Animal spirits” is a term coined by British economist John Maynard Keynes to refer to investors’ confidence in taking action, and the gauge uses the three-month weighted average to smooth out volatility in the single-month readings.

Signs that the economy has put the worst behind it should give policy makers some respite. The central bank has eased policy, while the government has widened budget deficit goals to spur economic growth, which is set to be the weakest in more than a decade this year. The latest health check for the economy is due Friday, when gross domestic product data for the October-December period will be published.

Here are the details of the dashboard:

Business Activity

The Markit India Services PMI index climbed to 55.5 in January — the highest in seven years — from 53.3 in December. That, together with an improved showing in the manufacturing purchasing managers’ survey, helped push the composite index higher to 56.3. A reading above 50 indicates expansion.

Gaining Traction

The improvement in growth was accompanied by stronger inflationary pressures, according to the PMI surveys, with input costs rising by the most since February 2013 and output price inflation surging to a near two-year high. Those price pressures mirror a spike in inflation to 7.6% in January.

Exports

Exports remained a laggard, falling 1.7% in January from a year ago. The drag was mainly because of a drop in shipments of gems and jewelry along with engineering goods. Prospects of a recovery in trade in the near-term appears remote as the spread of the coronavirus disrupts supply chains and weakens global demand.

Consumer Activity

Consumer sentiment worsened to an almost five-year low, according to a survey by the Reserve Bank of India. The current situation index fell to 83.7 in January, with 100 being the dividing line between pessimism and optimism.

Another survey showed that pay increases across India’s organized sector will probably grow at its slowest pace since 2009 this year, which in turn can crimp consumption. Domestic sales of passenger vehicles declined 6.2% year-on-year in January, data from the Society of Indian Automobile Manufacturers show, highlighting sluggish demand for discretionary purchases.

Loan growth rose 7.1% in January from a year earlier with lower borrowing costs and better policy transmission gaining traction. The weighted average lending rate was down 13 basis points last month, although the Citi India Financial Conditions Index showed a slight tightening of money supply.

Industrial Activity

Industrial production contracted 0.3% in December from a year ago, led by weak manufacturing activity and the automobile sector. Other components on the production side, namely mining and electricity, grew at a healthy clip.

The index of eight core infrastructure industries, which feeds into factory output, offered a ray of hope: activity rebounded in December after four months of contraction. That was mainly due to higher production of fertilizers, cement, refinery products, coal production and steel. Both the data are published with a one-month lag.