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Festival of Lights fails to revive India’s sullen animal spirits

Poor reading in all key markers signals a protracted slowdown, and may influence the RBI to cut rates more.

Updated: Nov 21, 2019, 12.51 PM IST
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By Anirban Nag

India’s peak festival season did little to lift economic activity last month, suggesting growth is in for yet another quarter of slowdown.

The dial on a gauge measuring activity in October remained stuck in the same place it was a month ago. A majority of eight high-frequency indicators compiled by Bloomberg News showed weakness based on the three-month weighted average reading.


The dashboard measures “animal spirits,” a term coined by British economist John Maynard Keynes to refer to investors’ confidence in taking action. The poor reading signals a protracted slowdown, and may influence the Reserve Bank of India to cut interest rates for a sixth time this year in December.

The RBI has already cut rates by a cumulative 135 basis points in 2019 after economic expansion slowed to a six-year low of 5% in the April-June period. Data for the July-September quarter, due November 29, will probably show growth was subdued, if not weaker.

Here are the details of the dashboard:

Business Activity
India’s main services index signaled a contraction for a second straight month. The IHS Markit India Services Index was at 49.2 in October from 48.7 in September, marking the weakest stretch since 2017. A purchasing managers survey of Indian factories also had the worst result since 2017. Both the readings combined to drag down the composite PMI to 49.6 from 49.8, with a number below 50 indicating a contraction.


Inflation pressures rose, mirroring a similar trend in consumer price gains. Purchasing manager surveys showed that input cost inflation accelerated to a eight-month high, with some companies passing on the increase to customers.

Exports remained subdued, although the 1.1% year-on-year contraction in October was shallower than the previous month’s 6.6% decline.


A worrying sign, however, was the anemic non-oil and non-gold imports that suggest weak domestic demand conditions. A fifth straight month of decline in capital goods imports signals subdued investment spending.

Consumer Activity
India observed its biggest religious festival, Diwali, in October, when shoppers usually spend on food and gifts. This year, festival sales were relatively subdued.

More than 90% of storekeepers indicated footfalls were lower than last year, according to research by Bank of America Merrill Lynch analysts.

Car sales fell 6.3% in October from a year ago - the 12th straight month of decline - after plunging 33% in September, according to data released by the Society of Indian Automobile Manufacturers. Two-wheeler sales were down 14.4% from a year earlier while demand for trucks and buses were down 23.3%.

While loans were up in absolute numbers, growth in bank credit has slowed to around two-year lows amid sluggish demand from companies. Banks have also been reluctant to pass on recent rate reductions to customers, hindering loan growth.


The spread between the RBI’s key policy rate and the weighted average lending rate on outstanding loans from commercial banks is near the highest in data going back to February 2012.

Financial conditions, as indicated by the Citi India Financial Conditions Index, improved during the month, but that didn’t make a huge difference to loan demand.

Industrial Activity
India’s factory output shrank by 4.3% to the lowest level in eight years in September, weighed down by a sharp fall in capital goods production. It’s likely that industrial production might struggle more in the coming months.

The index of eight core infrastructure industries, which feeds into the index of industrial production, declined 5.2% in September from a year ago -- its steepest drop in 14 years. A contraction in production in sectors like coal, steel, electricity and natural gas meant overall demand was weak. Both the core sector and industrial output numbers are reported with a one-month lag.

-With assistance from Don Ong.

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