Indian Economy Gathers Steam On Pent-Up Demand After Reopenings In May

The boost was triggered by an expansion in services activity and a robust growth in core infrastructure industries

Surging commodity prices kept merchandise imports above $60 billion for the third month in a row, while exports growth slowed due to geopolitical uncertainties.

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The economy of India gained momentum in May driven by pent up demand for services and higher industrial production as reopening continued from the Covid-19 pandemic curbs, as reported by Bloomberg.

According to the report, five out of the eight high-frequency indicators showed improvement, pushing the needle on a dial measuring so-called ‘Animal Spirits’ to 6, from 5, for the first time since July and the first upward move in more than a year.

The gauge is based on the three-month weighted average scores to smoothen out volatility in the single-month readings.

The boost was triggered by an expansion in services activity and a robust growth in core infrastructure industries. Though an unprecedented rise in input prices because of the obgoing Russia-Ukraine conflict and persistent demand-supply imbalances likely to spoil sentiment going forward. Rising food, fuel, labour, and transportation costs are forcing central banks across the world to prioritise price stability over growth.

The Reserve Bank of India (RBI) has raised borrowing costs by 90 basis points so far this year and vows to do more to bring price gains below its target ceiling of 6 per cent.

The report said that erratic weather and an uptick in virus cases risks also impeding the recovery. The number of daily virus cases increased about sixfold in the past one month.

Business activity

Purchasing managers’ index (PMI) surveys showed activity in India’s dominant services sector rose to the highest level in eleven years in May, while momentum in the manufacturing sector remained steady. That helped pull the S&P Global India Composite PMI to the 10th consecutive month of expansion.

High inflation, though, continued to weigh on business confidence as input costs climbed to a new record, the survey said. Companies continue to transfer mounting costs to consumers, which keep inflation elevated.

Exports

Trade deficit widened to an all-time high of $24.33 billion in May due to higher gold and petroleum imports. Official data stated that soaring commodity prices kept merchandise imports above $60 billion for the third month in a row, while exports growth slowed due to geopolitical uncertainties.

Consumer activity

Automobile sector saw another month of decline in May, but the extent of fall was smaller as some segments such as car and two-wheeler sales showed a pick-up from a month ago.

While bank credit grew 12.1 per cent at the end of May, from 11.1 per cent in April. Liquidity conditions also remained in surplus.

Industrial activity

Two other key indicators of industrial activity, which are published with a one-month lag, showed robust growth in April. Factory output growth rose to an eight-month high of 7.1 per cent from a year ago, led by a double-digit increase in electricity production, while manufacturing and mining also expanded at a healthy pace. A similar trend was seen in the output growth of eight infrastructure industries, which increased to 8.4 per cent from 4.9 per cent in March.