The Japanese brokerage firm retained its forecast for a 10.8% contraction in FY21.
The Nomura Monthly Activity Indicator, which takes into account high-frequency indicators from across sectors, improved to -8.6% year-on-year in September from -19.7% in August and a record low of -37.8% in June, “implying a swift GDP growth rebound,” the firm said in a report on Tuesday.
The latest report is in line with the Reserve Bank of India’s assessment that the mood of the nation is shifting from despair and fear to hope and that the economy could bounce back to growth in the fourth quarter.
In the run-up to the festive season, aggregate demand recovered to 77% of normal in September against 71% in August, while aggregate supply picked up to 92% of normal in September against 86% in August, it said.
While terming the improvements in September solid, Nomura questioned the durability of the rebound beyond the festive season in its report titled, ‘Activity improves, but is this a false dawn?’
The report highlighted the uneven pace of sequential recovery. While consumption, investment and the industrial sector recovered to 84%, 85% and 89% of pre-pandemic levels in September, respectively, “Recovery in the services sector remains glacial at 30.5% of normal vs 29% in August, as the transportation slowly returns to normal,” the report said.
Nomura retained its earlier forecast of a 10.8% contraction for the economy in FY21 along with negative growth estimates for the remaining quarters (-5.4% in Q3 and -4.3% in Q4).
According to the report, the pickup in indicators could signal a “faux recovery” limited to festive consumption, while the gains made in reducing the daily Covid-19 cases could be reversed due to the movement of people around the season and the Bihar elections, resulting in a drag on growth momentum.
“The underlying weakness in the labour market (pressure on household incomes) and the government’s underwhelming demand-side fiscal support are also a concern,” Nomura said.
Multiple indicators of economic activity showed strong improvement in September, with passenger vehicle sales growing at 26.45% YoY against 14.6% in August. Electricity demand grew at 3% for the month compared to a 2% contraction a month earlier and goods and services tax (GST) collections clocked in a 10.4% growth over the preceding month at Rs 95,480 crore.
This was the highest GST mop-up since April, according to EY’s chief policy advisor, DK Srivastava. Power consumption turned positive in September after six successive months of contraction and climbed 10.3% further till October 24, he said in EY’s economic report for October.
Further, the Purchasing Managers’ Index for manufacturing touched 56.8 in September, the highest level since January 2012, the EY report said.
Inflation and Monetary Policy
While the space for monetary policy is constrained, with inflation likely to remain elevated in October, inflationary pressure is likely to retrace over the next 6-12 months as food prices begin to correct and a favourable base effect and easing of restrictions on logistics disruption start kicking in from December, Nomura said.
The brokerage still expected another 50-basis point policy rate cut from the Reserve Bank of India, but said this would only be possible in the first half of 2021.
“We remain less confident in the durability of the growth recovery and the limited fiscal support effectively means that the policy ball firmly remains in the RBI’s court,” it said, adding that open market operations and tools like the targeted long-term repo operations are likely to be the new normal.