In spite of the re­cov­ery in the econ­omy in July, why are ex­pec­ta­tions so tepid?

Mint Asia ST - - Mark To Market - The econ­omy is re­cov­er­ing Ex­pec­ta­tions re­main luke­warm


Nikkei In­dia Com­pos­ite PMI Out­put in­dex, a gauge of pri­vate sec­tor eco­nomic ac­tiv­ity in both the man­u­fac­tur­ing and ser­vices sec­tors, came in at a strong 54.2 for July, up from 52.6 in June. A read­ing above 50 de­notes ex­pan­sion, while one be­low 50 in­di­cates con­trac­tion. As chart 1 shows, the com­pos­ite PMI (Pur­chas­ing Man­agers’ In­dex) is at its high­est level since Oc­to­ber 2016, the month be­fore de­mon­eti­sa­tion.

That means mo­men­tum has been re­stored in the econ­omy. This is also borne out by other in­di­ca­tors, such as auto sales, ris­ing bank credit, in­creas­ing ru­ral de­mand and, in spite of its many flaws, the In­dex of In­dus­trial Pro­duc­tion. Un­for­tu­nately, a rather con­trary tale is be­ing told by the sen­ti­ment in­di­ca­tors. As Chart 2 shows, the Fu­ture Ex­pec­ta­tions sub-in­dex of the PMI is now lower than what it was in March, April and May, and in­deed in many months last year as well. Re­call also the fore­bod­ings about the fu­ture shown in the Re­serve Bank of In­dia’s Con­sumer Con­fi­dence Sur­vey. And that’s not all—rbi’s in­dus­trial out­look sur­vey, which polls man­u­fac­tur­ing com­pa­nies, showed that its Busi­ness Ex­pec­ta­tions in­dex for the se­cond quar­ter of FY19 de­clined from the pre­vi­ous quar­ter.

The ques­tion is: why, de­spite the re­cov­ery in the econ­omy, is sen­ti­ment so low? Why is it that, al­though the PMI sur­veys show ris­ing em­ploy­ment lev­els, those sur­veyed in the RBI Con­sumer Con­fi­dence Sur­vey feel there will be lit­tle im­prove­ment in their job prospects and in their in­comes in the next one year?

There could be sev­eral rea­sons. Per­haps Chart 1: Both man­u­fac­tur­ing and ser­vices showed strong ex­pan­sion in July. busi­nesses are wary about the global en­vi­ron­ment, with its trade wars and ris­ing geopo­lit­i­cal ten­sions. They may even be con­cerned about po­lit­i­cal risks as we come closer to the gen­eral elec­tion next year. Per­haps, as In­dusInd Bank Ltd chief econ­o­mist Gau­rav Ka­pur says, busi­nesses may be wor­ried about mar­gins, as the PMI sur­veys con­sis­tently show ris­ing in­put costs and so far tepid out­put charges. It may well be, as Union min­is­ter Nitin Gad­kari re­port­edly said, that there are no jobs. Re­ports say there are a huge num­ber of un­filled va­can­cies in govern­ment posts and that may be a rea­son for de­spon­dency. And, of course, there is no data on whether the in­for­mal sec­tor has re­cov­ered.

On the other hand, it may sim­ply be that per­cep­tions take time to change. Af­ter all, as Chart 1 shows, it was just a cou­ple of months ago that the ser­vices sec­tor con­tracted and the re­cov­ery in man­u­fac­tur­ing too has been Chart 2: Busi­ness ex­pec­ta­tions are lower now than they were three months ago. patchy. Past ex­pe­ri­ence colours fu­ture ex­pec­ta­tions, which are slow to change. Busi­ness­men and con­sumers have been ex­posed to shocks in the past two years, and it will take a while for full con­fi­dence to re­turn.

But the govern­ment can­not let the re­cov­ery take its own sweet time, not with elec­tions less than a year away. Al­ready, it has set in mo­tion sev­eral in­ter­ven­tions in the econ­omy, through higher min­i­mum sup­port prices for farm­ers, higher im­port du­ties to pro­tect in­dus­tries and lower in­di­rect taxes. But if it wants vot­ers to feel good be­fore elec­tions, it must en­sure that busi­nesses are not sub­jected to tax ha­rass­ment, that ex­porters get their re­funds in time and that farm sup­port prices are backed by ad­e­quate pro­cure­ment. It must en­sure an in­crease in con­struc­tion jobs, so that the masses get em­ploy­ment. Most im­por­tantly, it must en­sure that the eco­nomic re­cov­ery con­tin­ues smoothly.

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