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    Indias Animal Spirits Stabilize as Virus Rages Across Economy

    Abstract:Indias economy showed signs of stabilizing in August with manufacturing and services gradually improving even as coronavirus cases escalated across the country.

      Indias economy showed signs of stabilizing in August with manufacturing and services gradually improving even as coronavirus cases escalated across the country.

      Five of the eight high-frequency indicators compiled by Bloomberg News gained last month, while two were unchanged and one deteriorated. That kept the needle on a dial measuring so-called animal spirits steady at 4 -- a level arrived at by using the three-month weighted average to smooth out volatility in the single-month readings.

      Activity Stabilizing

      Manufacturing and services sectors helped a recovery in August

      Sources: Bloomberg, IHS Markit, Government of India, Citigroup Global Markets Asia Ltd.

      NOTE: Overall activity reading is generated aggregating the three-month weighted averages of eight indicators against the past thirty months of historical data. The indicators are Markit India Composite PMI, Output Price Index, Order Books Index, Citi Financial Index, Government data on exports, industry and infrastructure sectors, and RBI data on demand for loans.

      A strong rebound is still a far way off though as a surge in virus cases continues to disrupt activity and has led many economists to downgrade their growth forecasts for the year.

      Read: Indian Economy May Plunge More Than 10% as Virus Spikes

      Business Activity

      Activity in India‘s dominant services sector continued to pick up, with the main index rising to 41.8 in August from 34.2 in July. While that’s a marked improvement from April‘s record low of 5.4, a number below 50 suggests it’s still in contraction territory.

      Gaining Traction

      Order books and prices are improving

      Source: IHS Markit, Bloomberg

      NOTE: Index reading above 50 signals growth. Score is generated based on the three-month weighted averages of the indicators against the past 30 months historical data.

      Manufacturing bounced back into expansion after four successive months of contraction, with the purchasing managers index rising to 52 from 46 in July. That helped push the composite index for August to 46 from 37.2 a month earlier.



      Exports suffered because of tepid global demand, with shipments falling 12.7% in August from a year earlier. Farm exports and shipments of drugs and pharmaceuticals bucked the trend, growing 22% and 17%, respectively. On the imports side, demand for gold was strong ahead of the festival season, resulting in a widening in the trade deficit.



      Going Nowhere


      Exports from India still contracting

      Source: Government of India, Ministry of Finance

      Consumer Activity


      Car sales, a key indicator of consumer demand, rose 14.1% in August from a year earlier, although the growth was from a weak base last year. Retail sales too showed signs of picking up, even though the number of consumers venturing out to buy goods was still 70% below the year-ago level, according to ShopperTrak.


      Those increases didnt translate into greater demand for loans. Central bank data showed credit grew 5.5% in August from a year earlier, slower than the 12% growth seen a year ago. To make matters worse, liquidity conditions tightened during the month.

      Slowing Down

      Demand for bank loans has waned

      Source: Reserve Bank of India, Bloomberg

      NOTE: Year-on-year loan growth to the commercial sector has slowed sharply. Loan amount is in trillion rupees.

      Industrial Activity


      Industrial production fell 10.4% in July from a year earlier, shallower than Junes revised contraction of 15.8%. Capital goods output -- a key indicator of demand in the economy -- dropped 22.8% from a year earlier.



      Output at infrastructure industries shrank 9.6% in July from a year ago and was slightly better than the 12.9% decline in June. The sector, which makes up 40% of the industrial production index, had contracted by a record 37.9% in April. Both data are published with a one-month lag.


      — With assistance by Don Ong

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