End of gloom for the economy?

Wherever you turn, there seems to be only bad news for the Indian economy. In the latest October-December 2012 quarter, while net sales growth (year-on-year) for CNX 500 companies barely managed to touch the double-digit mark , growing by about 11 per cent, net profits dropped by 7 per cent.

In the same quarter, the country recorded a GDP growth of 4.5 per cent, the lowest number since the 2008-09 global financial crisis.

Car sales in February saw the sharpest fall (year-on-year) in twelve years, while food inflation continues to remain strong, hitting consumer pockets and sentiment.

Amidst this gloom is talk that the slowdown confronting the economy has actually bottomed out and that we are in for better times. How true can this be? We turn to some ‘lead’ economic indicators which could tell us what’s in store.

Green shoots in PMI

A good advance indicator of the pulse of the economy is the Purchasing Managers’ Index (PMI). This survey is done among purchasing managers of about 850 manufacturing and service companies across the country.

Called the HSBC-Markit PMI, this study captures the trends in new business orders, employment, input/output prices, backlog of work and stock of raw materials/finished goods every month. Hence, unlike the Index of Industrial Production (IIP) which reflects actual production levels, the PMI gives a feel of the level of industrial activity that can be expected in future.

For example, even as exports were tumbling till December last year, the PMI survey among manufacturing companies picked up signs of expansion in new export orders beginning September 2012.

This has indeed played out, going by the marginal export growth achieved in January (1 per cent) and February (4.25 per cent).

Overall, with 50 points being the line that differentiates an expansion (> 50) in industrial activity from a contraction (<50), both the manufacturing and services PMI show a reading of 54.2 points in the latest available February 2013 numbers.

While this is good news per se, sub-components of the survey also reinforce hopes of a recovery. For one, new orders received by manufacturing companies have shown a solid rise in recent months. Growth in new orders in December 2012 accelerated to its fastest since June 2012.

This has been sustained in the first two months of 2013 as well.

In line with the accelerating demand, pre-production inventories and quantity of purchases (inputs) in these months have also leaped. This is in contrast to the situation of a weak expansion in new orders/production, a slowdown in quantity of purchases and a rise in post-production inventories seen in July/August 2012.

Trends in pending business for service companies also concur with the above trends. Purchase managers indicate a marked increase in outstanding business since December 2012. The rate of accumulation of backlog in February was the quickest in two-and-a-half years. There are also indications of better business expectations twelve months down the line due to planned capacity expansions and launch of new projects.

The Reserve Bank’s Q3 (third quarter) Industrial Outlook survey also shares this buoyancy.

Turning point

After contracting every quarter since the fourth quarter of 2010-11, its Business Expectations Index has, for the first time, expanded in the third quarter of 2012-13.

That there is optimism in the air can further be substantiated by another lead indicator — the OECD Composite Leading Indicators (CLI).

This global indicator is designed to signal turning points in economic activity for each country, at least six months before they actually happen.

For example, back in February 2009, when pessimism was still high, the CLI pointed to a possible bottoming out in economic activity in India, hinting at the beginning of an upswing.

This came good later in 2009-10. Similarly, after several months of pointing to deterioration, the CLI reports pertaining to October and November 2012 talk about tentative signs of a turning point in the economic activity in India.

Fleeting or permanent?

But if the above indicators point to an uptick in the economy, there is enough evidence that we are not completely out of the woods. One such indicator is the OECD business cycle clock. Using the CLI numbers, the OECD business cycle clock traces an economy through the four stages of expansion, slowdown, recession and recovery.

The long-term trend line for this index is at 100. An ‘expansion' implies that the CLI is above 100 and is displaying an increasing trend.

If the CLI is still above 100 but is showing a decreasing trend, the country is said to be witnessing a ‘slowdown'.

Similarly, a CLI below 100, showing subsequent falls month after month, indicates a ‘recession’ whereas a CLI below 100 but progressively rising, denotes a ‘recovery’.

According to this clock, from a one-year low of 96.8 points in September 2012, the CLI readings for India rose to 97.3 points in October 2012, and further to 97.9 points in November 2012, indicating a move into the recovery zone. However, subsequent numbers in December and January have slipped.

With the CLI having a lead time of about six months, this indicates that the journey back to growth is not going to be a smooth ride.

Break-up of the PMI brings out the reasons for this. Even when demand has been strong, the respondents point to supply-side constraints such as power shortages that have been playing spoilsport on output/production.

At times, suppliers’ delivery times have also lengthened because of the non-availability of adequate power supply.

The economic survey released last month puts these kinds of infrastructure bottlenecks in perspective. Using the capex database of the CMIE (Centre for Monitoring Indian Economy), the survey points that both in value and volume terms, stalled projects in sectors such as electricity, roads, steel, mining, etc., have been rising since early 2009, partly resulting in a drying up of investments in new projects as well.

Difficulties in land acquisition, coal linkages, and mining bans were seen as major causes for the slow pick-up in capex.

It is only now that policymakers have given their attention to these issues.

The setting up of a Cabinet Committee on Investments to fast-track projects, go-ahead to the Land Acquisition Bill by the Cabinet, budgetary steps to improve availability of finance for the infrastructure sector and speed-up on the industrial corridors, are a few moves.

But the question is, even if the roadblocks to new capacity are eased, how quickly can this come up? In sectors such as consumer goods where gestation periods are low, the new capacities may begin to contribute to the bottom line in a year or two. But there may be no such luck for players in core sectors such as energy, metals and power.

>vardhini.c@thehindu.co.in

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