Macro Matters (July 2021)

macro banner Macro Matters (July 2021)

CPI Inflation for Jun-21 almost flat at 6.26% as food price burden sharpens

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Retail headline inflation for Jun-21 came in at 6.26% compared to 6.30% in May-21. The consensus estimate for retail inflation for Jun-21 was closer to 6.9%, so it was surely lower than the consensus estimates. The sharp spike in headline inflation in Jun-21 was largely driven by food inflation bouncing from 5.01 to 5.15%. While urban India played a key role in non-food core inflation in Jun-21, it was rural India that played a bigger role in food inflation, which is possibly facing the pressure of erratic monsoons this year.

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There were 3 major points of note in the CPI inflation for Jun-21. Firstly, the food inflation spiked from 5.01% to 5.15% as supply chain constraints continued to push prices higher. This more than offset the favourable impact of core inflation falling from 6.5% to 6.19%. Secondly, fuel inflation shot up further from 11.58% in May-21 to 12.68% in Jun-21. While daily revisions were not so regular, OMCs continued to pass any possible burden to the
consumers. These fuel prices also have strong downstream effects as is evident from the transport inflation standing at 11.56% for Jun-21.

It is interesting to look at what triggered the spurt in food inflation from 5.01% to 5.15% in Jun-21, on top of a rapid spurt in May. Food enjoys a 45.8% weightage in the overall inflation basket and hence becomes a critical driver of headline inflation. The 14 bps jump in food inflation in Jun-21 comes on top of a 305 bps boost to food inflation in May. Food inflation was boosted by a number of items of mass consumption. Meat and Fish inflationtapered from 9.03% to 4.83% in Jun-21, but the problem was egg inflation which rose to an all-time high of 19.35% in Jun-21. Vegetable inflation flattened out to (-0.70%) in Jun-21 compared to (-1.92) in May-21. Pulses inflation in Jun-21 jumped to 10.01% while sugar inflation came back into positive at 0.79%, adding to the food price burden.
Bond yields on the benchmark 10-year G-Sec shot up to 6.13% in July from 6.05% in Jun-21 in the aftermath of the inflation announcement. Hopefully, the inflation has been largely driven by the base effect, and should taper over the next few months. Meanwhile, high levels of inflation is creating an added problem of low real returns for global investors.

IIP for May-21 bounces +29.3% but COVID 2.0 impact on output has been sharp

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The index of industrial production (IIP) grew at +29.27% for the month of May-21 yoy. That was hardly surprising consider that in the comparable May-20 month, the IIP had contracted by an unprecedented 33.38%. On that low base, an IIP boost of 29.27% means that the IIP absolute levels are at still about -13.9% below the pre-COVID levels seen in May-19. However, this base effect advantage could last for just about 1-2 months and could help compensate for some of the negative effects of COVID 2.0 on manufacturing growth.

One way to get a clearer picture of the IIP is by looking at the number over the same month in 2019. We did have a lost year due to COVID, but now the fear is that there may have been 2 lost years. To get a clearer picture, we look at the cumulative Apr-May period in 2021 and compare with the similar period in 2019, which is representative of the pre-COVID period. Let us break it up into smaller classifications of mining, manufacturing and electricity for a better granular understanding. For the Apr-May 2021 period, the mining growth stood at 29.4%, manufacturing grew at 88.8% while electricity grew at 21.7% on a yoy basis.

The overall IIP growth in the first two months of FY22 showed growth of 68.8% yoy. That is more because all the 3 components as well as overall IIP for Apr-May 2020, were deep in the negative. If you look at the Apr-May 2021 data and compare it to the corresponding Apr-May 2019 data, then IIP is lower by -7.16%. In other words, the COVID 2.0 has been instrumental in delaying the post-pandemic recovery to the extent that we are still to recoup pre-COVID levels last seen 2 years back.

With 29.3% IIP growth, May-21 was likely to be dominated by the IIP gainers, on a yoy basis. Overall, manufacturing with a weight of 77.64% saw IIP growth of 34.48% in May-21 on yoy basis but on a 2-year comparison, the manufacturing IIP is down by -16.34%, showing the amount of stress that has been added to IIP due to COVID 2.0. For May-21, Electricity generation grew +7.50% yoy but was down -8.52% on 2-year comparison. Similarly, mining was up +23.29% yoy but even mining was down -1.23% on 2-year comparison. When, you look at 2-year growth, it normalizes the exorbitant growth on yoy basis and gives a clear message that COVID 2.0 has added a lot of secondary stress to the IIP.

IIP data for May-21 indicates that COVID 2.0 has surely taken its toll on growth. The -7.93% IIP contraction over May-19 is indicative of the immediate impact of COVID 2.0. For now, the message to policy makers is two-fold. The ecosystem of low rates and ample liquidity will have to continue for now. At the same time, government has to plan a few intermittent bursts of fiscal support to keep manufacturing chugging along. That is already visible.

Trade deficit for Jun-21 widens to (-$9.37) billion on higher imports

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Merchandise trade deficit for Jun-21 came in at $9.37 billion; compared to just $6.28 billion deficit recorded in May-21. Indian merchandise exports were largely flat at $32.50 billion since the export thrust programs like in-sourcing and Make in India will deliver results over the medium term. However, there was a sharp spike of 8.6% in overall imports of merchandise goods, leading to a widening of the trade deficit for Jun-21.

Exports at $32.50 billion in Jun-21 were flat, up just about 1% on a sequential basis. However, on a yoy basis, the exports were up by a whopping 48.33%; largely on account of the base effect. Among star export performers, growth came from cereals (+235.93%), petroleum products (115.37%), man-made yarn (+81.72%), Gems & Jewellery (+80.53%), Meat, dairy, poultry (+61.81%), Handicrafts (+55.10%), Plastics & Linoleum (+53.80%), Engineering Goods (+52.90%), Electronic Goods (+45.20%) and Jute (+44.93%).

Merchandise imports for May-21 were at $41.87 billion, 98.34% higher yoy. Imports were, also higher by 8.6% sequentially. Crude oil imports at $10.68 billion in Jun-21 were higher by 116.51% yoy. However, oil imports into India are likely to be impacted due to weak demand that could arise from steep prices locally. A number of commodities showed lower imports on a yoy basis for Jun-21. The fall was (-91.38%) for Silver and (-12.49%) for project goods.

It is not enough to just look at merchandise trade but also at services trade. For Jun-21, combined deficit of merchandise and services trade stood at $(-2.33) billion enhancing the cumulative deficit for FY22 from $5.85 billion to $8.18 billion. The worry is that the first quarter overall deficit in FY22 is nearly 75% of the overall full year deficit for FY21.

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Data Source: DGFT

The message from the trade data is that the focus will have to shift back to good old exports if the momentum of trade has to be sustained in the long run. The oil substitution and Make in India ventures are not going to happen in the short run. Clearly, the SMEs which account for a bulk of India’s exports, have borne the brunt of COVID 2.0. Unless that is rectified, Indian trade data would find it hard to extricate from a sort of Catch-22 situation.

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