It’s still too early to celebrate the recovery in the Indian economy

The Covid-19 outbreak and the ensuing lockdowns brought the Indian economy to a halt earlier this year. In June, the country’s economy – which was counted among the world’s fastest-growing not long ago – contracted 23.9%.

But as the Narendra Modi government began unlocking commercial activity, there have been visible signs of improvement. In September and October, the country has seen growth in exports and factory output.

However, experts warn that these figures should be taken with a shovel of salt.

While some level of normalcy is getting restored, it is too early to predict that this trend will continue. Even as the supply of most goods has stabilised, demand continues to be a cause of concern.

India’s consumption story

India’s exports grew year-on-year in September, for the first time since the lockdowns were announced in March.

The good news is that the recovery is not just focused on essential goods, but is more broad-based. “It is the strongest in essential items (pharma, agri), followed by capital-intensive items like engineering goods and chemicals,” according to an October report by Edelweiss’ India equity research arm.

What has been central to the pick-up in exports is the strong overseas demand fuelled by economic stimulus packages in the US and Europe. Also, China, which is one of the favourite export destinations for Indian companies, has recovered rapidly.

But the fact that this demand is linked to economic stimulus, which raises concerns.

“The quantum and nature of the fiscal stimulus in advanced economies also matter for export demand from emerging markets like India,” said Sreejith Balasubramanian, economist (fund management), at IDFC Asset Management Company. “The US, for example, is yet to decide on the second round of the stimulus package. The Covid infection rate there would also be equally important.”

Balasubramanian also warned that, incrementally, a higher proportion of global layoffs could be more permanent in nature if the economic recovery loses steam or is not adequately supported. This means the export growth momentum may not be sustainable in the long-run.

What worsens this uncertainty is the fact that back home, consumption is still fragile. In September, imports contracted by a staggering 20% year-on-year.

There are several other indicators that show why it may be too early to celebrate the recovery in the Indian economy.

India’s choppy recovery

Recovery in several sectors continues to be choppy with some segments witnessing growth while others lagging. For instance, in the automobile industry, tractor sales grew year-on-year in October, however, other segments such as passenger vehicles, two-wheelers, three-wheelers and commercial vehicles (small and big trucks) continued to contract.

The rise of tractor sales is predominantly due to the government’s stimulus package and decision to increase the minimum support price for the Kharif crop. But this will not be enough in the long-run as rural India has been suffering from structural issues like lack of services and low-productivity.

Similarly, the passenger vehicle segment had witnessed growth in September due to pent-up demand, people’s desire to avoid public transport, and the festival season that is considered auspicious for big-ticket purchases. With such cyclical factors and a low-base driving automobile sales, the turnaround did not last in October.

The spike in some segments of auto sales has also been matched with an increase in the consumption of petrol and diesel. As more people prefer private mode of transport, petrol and diesel demand is going up.

India’s supply-side problems

While the demand side is riddled with uncertainty, the supply-side has been recovering.

The composite purchasing managers’ index for manufacturing and services, a popular reading released by London-based IHS Markit, hit a nine-year high of 58.6 in October – after expanding for the first time in September post lockdown. A purchasing managers’ index reading below 50 means contraction.

These positive developments are partially echoed by Nomura India Business Resumption Index. While the index shows that there is a strong recovery, it also dips slightly in the last week of September and the first week of October. The index takes into account driving mobility from Apple, Google mobility data, labour force participation, and power demand.

But the supply side uptrend has to be met with an equal rise in demand for the Indian economy to see a solid return to growth, experts said.

“Currently, manufacturing from the supply side and rural from the demand side could be doing better but it needs to be seen if this sustains once pent up and festive demands wane off,” said Balasubramanian. “While government support is important, the path of the pandemic post the festive season would also be crucial.”

This article first appeared on Quartz.