Fading political uncertainty in India raises hopes of an economic rebound

India's economy showed nascent signs of a recovery in April as a general election got underway, helping to somewhat lift the political uncertainty holding back investments.

Overall activity from eight high-frequency indicators compiled by Bloomberg News suggest the economy picked up slightly last month, with the dot moving one notch to the right. The dashboard is a measure of “animal spirits,” a term coined by British economist John Maynard Keynes to refer to investors’ confidence in taking action.
 

While the monthly PMI numbers and other indicators suggested a weakening in growth, the three-month weighted average -- to smooth out volatility in the single-month readings -- was positive.

The results support a view that growth will rebound from here on after probably cooling for a fourth consecutive quarter to 6.5% in the three months to March, the weakest pace since mid-2017. Investors are already breathing a sigh of relief after exit polls suggested a second term for Prime Minister Narendra Modi.

The Reserve Bank of India, having lowered interest rates by 50 basis points so far this year, may ease again at its next policy meeting in June to support growth.

Here are the full details of the dashboard:

Business Activity

Although the Nikkei India Composite PMI Index fell to a seven-month low of 51.7 in April, big gains in previous months kept the three-month weighted average at 52.4. A reading above 50 indicates expansion in manufacturing and services activity.

The monthly drop was linked to disruptions related to the elections, said Pollyanna De Lima, principal economist at IHS Markit and author of the PMI report, adding that “companies generally foresee improvements once the government is formed.”

The survey showed price inflation in India’s services sector moderated to the second-slowest rate recorded in almost two years. Both the manufacturing and services sectors also witnessed negligible increases in output charges in April, indicating subdued price pressures.

Exports

Exports grew just 0.6% in April from a year ago, while contracting almost a fifth compared with the previous month, as shipments of gems and jewelry, engineering goods, and leather products declined. On a month-on-month basis, imports fell nearly 5%, which Upasna Bhardwaj of Kotak Mahindra Bank Ltd. said was consistent with the slowdown in the economy.

Consumer Activity

Companies from Unilever NV’s local unit to homegrown firms like Dabur India Ltd. and Godrej Consumer Products Ltd. are reporting slowing growth of corner-store staples like toothpaste and shampoos.

Automobile sales -- a key indicator of demand in both rural and urban India -- dropped 16% in April from a year ago, while car sales fell almost 20%, according to data from the Society of Indian Automobile Manufacturers.

The slowdown wasn’t limited to car sales. Air traffic in India, the world’s fastest-growing aviation market last year, expanded at the slowest pace in almost six years in March.

That spilled over to the growth in demand for bank loans, which grew 12.95% in April from a year ago, compared with 14.6% expansion in the beginning of March, according to central bank data.

The Citi India Financial Conditions Index, a liquidity indicator, was broadly unchanged in April with overall conditions fairly tight.

Industrial Activity

Growth in India’s core infrastructure sector, which constitutes 40% of total industrial production, accelerated to 4.7% in March from 2.2% in February.

That bodes well for industrial production, which although contracting on a year-on-year basis in March, showed improvement from the previous month. The index rose to 140.2 from 127.5 in February, lifting the three-month weighted average to 135. Data for both indicators are reported with a one-month lag.