Economy buoyed by pent-up demand as supply improves with monsoon catching up

·4 min read

The Reserve Bank of India has recently released its monthly bulletin for July 2021. It states that the economy is gaining as the second wave of the pandemic retreats.

As per the report there are clear indicators of revitalisation of the economy. The sowing of major crops has picked up across the country, after the initial lull in the progress of the monsoon.

Tractor sales have surged well above pre-pandemic levels and fertiliser sales have also increased. Rural unemployment is declining and so is the demand for work under NREGA.

The report also states that inflation is on track to staying within the trajectory envisaged (4%-6%) and it is likely to stabilise during the rest of the year.

5 key takeaways:

1. Less impact of 2nd wave compared to 1st

1,427 listed non-financial companies which account for 86.8% of the market capitalisation have declared their earnings results. The net sales of these companies declined around 9% (Q on Q) compared to a 32% drop last year after the lockdown. The “demand is limping back towards normal levels, but a catch-up will take some more time.”

The hiring activity by the top IT companies are showing signs of revival. Due to better balance sheets, interest expenses fell sharply, reflecting the impact of deleveraging.

2. High pent-up demand released by unlocks & vaccination

Aggregate demand conditions are buoyed by the release of pent-up demand post unlocking and easing of restrictions. E-way bill collections rose to their highest level in the last four months, clocking a growth of 17.3%. Toll collections rebounded in July, nearing the March 2021 mark. Fuel consumption recorded an uptick in July 2021. The consumption of petrol reached pre-pandemic levels.

Retail sales of motor vehicles turned around, hitting a growth of 33.7% y-o-y and 27.7% m-o-m in July. Rural demand remained up-beat, with tractor sales registering a growth of 3.3% y-o-y in July, well above pre-pandemic levels. Freight carried by Indian Railways remained resilient, marking an increase of 18.4% y-on-y in July (112.7 million tonnes).  

Aviation sector recorded some rebound in air passenger footfalls in the 1st week of August as vaccinations improved travel sentiments. The FMCG sector saw sales picking up in the rural areas and small towns as sentiments improved on the back of the favorable monsoon.

Consumer electronics recorded the best-ever July sales. The unemployment rate plunged to 6.95% in July from 9.17% in June. GST collections for the month of July 2021 at Rs1.16 lakh crore, again surpassed the Rs1 lakh crore mark. Gross tax revenues improved considerably, even compared with 2019-20, gross tax revenue marked an increase of 32.8%. Exports stayed above $30 billion for the fifth successive month in July.

3. Supply catching up post revival in monsoon

The supply situation is improving with the monsoon catching up to its normal levels. As on August 13, 2021, kharif acreage stood at 997.1 lakh hectares, 2.1% above the normal acreage. Overall, around 93% of sowing has already been accomplished. Acreage under tur – the main kharif pulse – has been higher by 5.2% y-on-y.

The PMI Manufacturing Index hit a 3-month high in July from the contraction it had entered in June after a gap of 11 months. With unlocks and vaccination drives gaining momentum, the manufacturing activity is “gradually turning around, while contraction in services has moderated”.

4. Inflation likely to stabilise

The headline CPI inflation for July 2021 was 5.6% down 70 bps from 6.3% a month ago. This reinforces the RBI's view that current inflation is transitory, induced by supply side bottlenecks. The recent upsurge has peaked and the worst would be behind us.

RBI also threw a light on the much debated association between growth and inflation. “A reduction in the rate of inflation can only be achieved by a reduction in growth; an increase in growth is only possible by paying the price of an increase in inflation, always and everywhere. A one percentage point reduction in the rate of inflation, 1.5-2 percentage points of GDP growth has to be foregone. The MPC voted to give growth a chance to claw its way back into the sunlight.”

RBI defended its decision of keeping the interest rates unchanged despite high inflation in the report. “... what if the MPC doggedly attacks the supply shock induced price pressures in spite of the current state of the pandemic-ravaged economy and as a consequence, economic activity wilts into depression? No amount of humility will wipe away the tears then.”

5. Digital Currency is WIP

RBI states that the Central Bank Digital Currency (CBDC) project is a work in progress. “The CBDC may not directly replace demand deposits held in banks but will complement physical cash. It would compete with other online and offline payment methods and thereby support a more resilient and diverse payment system while shunning the risks associated with private digital currencies. Going forward, CBDCs could form the backbone of a highly efficient new digital payment system.”

To sum up, clearly growth and putting India on the path of recovery is the top priority of RBI currently.


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