Economic recovery broadened in Q3 FY2022; durability remains elusive: ICRA

20 Jan 2022 , 11:50 AM

ICRA highlighted that while there was some evidence of the economic recovery becoming more broad-based in Q3 FY2022, it was yet to attain the durability being sought by the Monetary Policy Committee (MPC) as a precursor to policy normalisation.

According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “Economic activity rebounded in December 2021, even as many sectors continued to trail the performance recorded in October 2021. Encouragingly, the quarterly data suggests a modest broad-basing of the recovery in Q3 FY2022, relative to Q2 FY2022, when compared to respective pre-Covid volumes. However, the onset of the third wave of Covid-19 has triggered state-wise restrictions, which have expectedly interrupted the momentum in the ongoing month, reiterating that the recovery is yet to attain durability.”

The year-on-year (YoY) performance of 10 of the 15 high-frequency indicators improved in December 2021 compared to November 2021, such as the generation of GST e-way bills, non-oil merchandise exports, electricity generation, two-wheeler output as well as aggregate deposits and non-food credit of scheduled commercial banks.

While the performance of Coal India Limited (CIL), passenger vehicles (PVs), vehicle registrations, ports cargo traffic and domestic airlines’ passenger traffic worsened in December 2021, relative to the previous month, this was predominantly driven by the unfavourable base. Regardless, the YoY performance of nine of the 15 high frequency indicators in December 2021 trailed the growth seen in October 2021.

In addition, FASTag toll collections and retail payments rose to all-time highs in December 2021, while the monthly mobility for retail and recreation rose above the level of baseline period for the first time since the onset of Covid-19.

“In terms of the quarterly performance, nine of the 14 non-financial lead indicators (including commercial vehicle output) reported higher volumes in Q3 FY2022, relative to Q3 FY2020; this is moderately better than the pre-Covid performance in Q2 FY2022, when seven indicators (output of CV and CIL, GST e-way bills, rail freight, petrol consumption, non-oil exports, and electricity generation) had recorded higher volumes. Encouragingly, the PV output and ports cargo traffic recorded a turnaround, printing above their pre-Covid volumes in Q3 FY2022, suggesting a modest broad-basing of the economic recovery. However, margin compression may have constrained the value-added growth, based on which ICRA expects the real GDP to expand by 6-6.5% YoY in Q3 FY2022 (+8.4% in Q2 FY2022),” Ms. Nayar said.

“Following the re-imposition of state-wise restrictions to curb the third wave of Covid-19, the early data for January 2022 is expectedly weak; the daily average generation of the GST e-way bills dipped to 2.1 million during January 1-16, 2022 from 2.3 million in December 2021. After a YoY growth in December 2021, the sales of petrol and diesel of state refiners slipped back to a contraction in the first half of January 2022. Moreover, the YoY growth in electricity demand eased to 1.9% during January 1-16, 2022 from 2.8% in December 2021,” Ms. Nayar added.

Following the fresh uncertainty triggered by Omicron and the associated restrictions, the rating agency expects a status quo on the stance of the Monetary Policy as well as the reverse repo rate in the upcoming meeting of the MPC to be held in February 2022, in spite of the rise in the retail inflation in December 2021.

The monthly indicators tracked by ICRA include the production of PVs, motorcycles, scooters, vehicle registrations, output of CIL, electricity generation, non-oil merchandise exports, ports cargo traffic, rail freight traffic, generation of GST e-way bills, domestic airlines’ passenger traffic, consumption of petrol and diesel, aggregate deposits and non-food credit of scheduled commercial banks. The quarterly data also includes CV output.