Invest in consumption

Data indicate a pickup in retail consumption and increase in consumer confidence

The Li Keqiang Index has become a famous economic measure. The Chinese premier embarrassed his nation’s statisticians when he confessed that he tracks several high-speed indicators, rather than trusting China’s gross domestic product (GDP) numbers.

India-watchers need to track high-speed indicators, too.  The macro data are increasingly suspect and might not accurately reflect changes in economic conditions. Apart from the introduction of new data series that generate puzzling data, the economy has just absorbed one big shock, and is bracing for another large shock.

The big shock was demonetisation. Five months after the last notes were deposited, we still don’t know key details about the impact. Over the next six months, even longer, the new goods and services tax (GST) is bound to have teething troubles and cause short-term shock. It can be argued that demonetisation severely damaged only the informal economy and the impact has not been fully picked up by statistics-gathering mechanisms.

The latest GDP numbers do reflect some impact in the fourth quarter (Q4) but the figures still seem suspect for the full year. In any case, GST will affect everything. The effects will show up in corporate data, in macro-stats, including revenue collections and hence, fiscal deficits, and inflation, which will affect the informal economy, too.

What high-speed indicators can you trust? Author and analyst, Vivek Kaul, is one of several persons who have started to combine high-speed indicators to get a sense of trends and economic movements. Kaul calls his data-set the Indian Economic Thermometer and tracks 24 indicators on a quarterly basis. His methodology is simple and Kaul hasn’t weighted these indicators to create a single index. He’s created a scorecard of up/down compared to the equivalent quarter of the previous financial year. However, he’s had to adjust data in several cases due to late releases. He had to also ignore bank deposits due to the demonetisation weirdness — that means he’s using only 23 indicators at the moment.  

Kaul’s thermometer presents a sombre picture for the January-March 2017 quarter versus January-March 2016. As many as 14 of the 23 indicators have lost momentum compared to a year ago.  In absolute terms, bank credit is down; inwards-bound foreign direct investment is down; cement production is down; petroleum consumption is down; two-wheeler sales are down; government revenue receipts are down.There’s been a slowdown in the growth rates of commercial vehicle sales; electricity generation is flat; steel consumption is flat.

There are brighter spots. Imports and exports are up (excluding petroleum on both sides of the trade equation). Rail freight carriage has grown; tractor sales have grown and passenger car sales have grown.

Three data series show astonishing positive changes. Retail loans have grown at 83 per cent; industrial loans have grown at 178 per cent and commercial paper issuance has risen by 27 per cent. The jump in these three indices came in March. In terms of December 2016-February 2017, the trends were negative, compared to a year ago. These jumps could have been due to the year-end, or perhaps it was a V-shaped recovery. 

Kaul’s thermometer does not present the picture of an economy roaring along at seven per cent-plus GDP growth. The higher car sales, higher rural wages for men (and slightly higher wages for women), higher tractor sales and higher home loans (as part of the retail loans portfolio — car loans also fall under this umbrella) suggests some sort of pick up in retail consumption. Investors should look at higher exposures in those areas.

But, investment appears weak, or non-existent, going by lower bank credit overall and lower foreign direct investment. Other activity indicators like flat electricity generation, falling cement production, falling oil consumption and flat steel offtake indicate low industrial activity. If industrial loans recovery is sustained through April-June 2016, that could be a sign of some pick-up.

Housing finance, the fast-moving consumer goods sector and automobile and tractor manufacturers should be areas of increasing exposures. The good thing is housing and car manufacture both have long value chains and action may stimulate growth in the associated sectors.