The missing piece in economic recovery:
The pace of contraction of the Indian economy slowed significantly in the September quarter (Q2). It caught many economists and analysts by surprise.
In Q2, the contraction in India’s gross domestic product (GDP) was at 7.5%, better than the market consensus of ~8.5-9%.
It is a remarkable fear considering the lack of government expenditure.
The government expenditure- which includes- public administration, defense and other services- decelerated further from -10.3% in Q1 to -12.2% in Q2. Historically, the government's spending on Capex has provided major support to the economy.
Had the government stick to its pace of budgeted expenditure, the recovery in Q2 would have been faster. The increasing fiscal deficit is a major constraint for the government. It is also possible that the government would have taken a back seat as a large number of factors were helping in the recovery.
We could possibly see the government expenditure picking up in the latter part of FY21 once other indicators start moderating again.
Good traction in demand for LCVs:
The November sales data of auto sales has pointed at demand recovery in the commercial vehicle (CV) segment. Specifically, light commercial vehicles (LCVs) seem to be in high demand and driving the revival in the CV space.
From the monthly sales data released so far, Ashok Leyland's LCV sales increased by 31% YoY in November while Medium & Heavy commercial vehicle (M&HCV) demand remained muted with -17% degrowth. Maruti Suzuki has also reported a similar trend with 40% LCV sales growth in November.
From the trends of November, the CV makers are likely to identify the LCV segment as a growth driver of the future. Several management commentaries, post-September results had indicated LCV segment to pick up among the fleet operators.
November data seems to have validated their stand and the future strategy of CV makers is likely to revolve around the LCV segment. This trend will be further validated in the coming days as Tata Motors and Eicher Motors are yet to publish their November data.
Manufacturing activities moderates a little in November:
IHS Markit India Manufacturing Purchasing Managers' Index (PMI) remained strong at 56.3% in November. However, it has lost traction and slipped from 58.9 in October. At 56.3, it is also at a three-month low in November.
In PMI terminology, a print above 50 means expansion, while a score below that denotes contraction.
Despite being moderated from the top, the Indian manufacturing sector witnessed strong growth of new orders and output sustained during November.
Shrinking pent-up demand, higher inflation, and uncertainty over the fresh Covid wave continue to pose challenges. Under this effect, manufacturing PMI could moderate from the current elevated levels going ahead. However, it is largely unlikely that the manufacturing sector will again go into contraction mode below 50.