Interpretation of high-frequency economic data for April, May, and June this year will be difficult. The same will apply in March 2021, as the growth data in the core sector shows. The enthusiasm for the 6.8% growth rate was lower this month, supported by growth of 23% in steel, 32.5% in cement and 21.6% in power. Ideally this should be the time of celebration.
The problem with these data is called low base effect in economics. The growth rates are calculated on the first year’s production data, so if there is a sharp decline in the output of the previous year, as in the case of these three industries, the growth rates were -21.9%, -24.1% and -8.2% respectively. Therefore, this year the figures of growth rate will always be seen to increase.
This base effect will continue from the first 5 months of the financial year -22 i.e. April to August, with the figures increasing from April to June. The same will happen in industrial development figures. The core sector of the industry basically consists of 8 sectors and is around 40% of the industrial production index. It is important to shed light on this side of development figures, as several states have announced lockdowns. Where there is complete lockdown, everything is shutting down, leaving essential services. It is closed, including clothing, electronics, TV, paper and electrical products, repair and service. Therefore, the impact on economic activity will only increase, as most states are moving towards complete lockdown.
Remember that last year, industrial production fell by 19%, 57% and 33% respectively in March, April and May. Therefore, despite the lockdown this year, growth figures will look up and may be in double digits. These figures have to be watched carefully. The same will happen with GDP growth rate.
According to Care Rantings, this could be 10.2% for FY22, compared to just 1.5% for FY20. Nearly two years after FY22, the growth rate will be around 7% of the actual level. The base effect will continue to increase the data numerically.
Then how does one assess real development? Two indicators of this would be useful. The first is the PMI (Purchasers Manufacturers’ Index) for the industry and services sector. These indicators compare year-over-year data to show that economic activity in the production and services sector was better than the first month. So the PMI of April will show that we are better than in March 2021. It also has limitations, as it has limited samples and the public sector is beyond it. The second indicator is bank credit growth in production and services. Which suggests that economic activities are increasing.
What about stock indicators? These will always confuse, as the Sensex reached a new high in FY 21, while the economy collapsed. The stock market is driven by daily news related to the epidemic. In general we can expect more good news and hence its direction will be upwards. But this does not mean that the economy is doing well. Likewise, we will hear strong positive figures in the next quarter, which will be associated with varying levels of lockdowns, trade-offs and job losses. We need to look at these figures wisely.
