IMA Analysis

Monday August 9, 2021

India Brief - July 2021

Author: Adit Jain, Editorial Director, IMA India July 2021

Political & Policy Issues to Watch

Signs of a thaw in Kashmir, though the road ahead will be long

In a significant development, Prime Minister Modi and Home Minister Amit Shah held discussions with the leadership of Kashmir’s main political parties. Coming nearly 2 years after the annulment of Article 370, the arrests of many of these individuals and the temporary ‘conversion’ of the state to a Union Territory, the meeting endorsed a planned delimitation exercise. This is to be followed by elections and a ‘restoration’ of statehood, though the two sides disagreed about the order in which these events should occur. The move appears to tie-in with ongoing back-channel talks with Pakistan, as well as India’s outreach to the Taliban in the wake of America’s ongoing departure from Afghanistan.

A welcome course-correction on vaccine procurement, and several relief measures for a battered economy

Starting with a course-correction on its Covid vaccination policy – shifting the onus for vaccine procurement back to the Centre – the government has rolled out several initiatives to mitigate the impact of the deadly second wave. The Finance Minister unveiled a new Rs 6.3 trillion package that is built primarily around credit guarantees, including for hard-hit sectors like tourism, exporters and power producers. She also extended the tenure of the Production Linked Incentive (PLI) scheme for electronics by a year (to 2025-26) and slashed GST rates on essential medical supplies. Separately, the RBI opened up the liquidity tap for certain ‘contact-intensive’ sectors like tourism and transport, and for MSMEs.

Outlook for the Market

Lead indicators are a mixed bag but point to a turnaround in June after a dismal May

India’s recent lead-indicator data reflect an economy that was hit hard by the second wave but is now starting to revive. The IHS Markit PMI for services and manufacturing continued to decline, to a recessionary 41.2 (from 46.4 in May) and 48.1 (from 50.8), respectively. Services companies reported a significant drop in new orders, sales and hiring. However, GST e-Way bill issuances picked up, from 40 million in May to 47.5 million in June, though they remain well below the high of 71.2 million recorded in March. Meanwhile, automobile sales saw a sharp recovery in June, with major car producers seeing a doubling (or more) of sales month-on-month from their May lows – though again, the aggregates are below the pre-second-wave levels. 2-wheeler makers like Hero, TVS and Honda all reported a recovery in sales, but by a more-modest 4-25% MoM.

Inflation continues to stiffen but this could prove temporary

Trade is up, the rupee is down

Inflation remains a near-term concern. In May, wholesale (WPI) prices jumped 12.9%, from 10.5% the previous month, led mainly by rising global oil prices. Consumer (CPI) inflation also firmed up, touching 6.3% - a 200 bps rise from April’s 4.3%. Expectations are that these numbers will temper in the next 3-4 months. On the external front, exports and imports are well above their pre-pandemic levels and perked up MoM in June. However, with the trade deficit continuing to widen (USD 9.4 billion in June), the rupee fell from 72.5/USD to 74.2/USD over the month even with a recovery in FPI flows (USD 1.8 billion, up from (-) USD 257 million in May).


Fiscal year starting 1 April 2017-18 2018-19 2019-20 2020-21 2021-22
GDP mp (FY12 series), real growth, % 7.0 2.9 3.6 6.00 65.0
Inflation - WPI, yr avg (FY12 series), % 6.1 4.3 3.4 6.25 68.6
Inflation - CPI, yr avg (FY12 series), % 4.2 4.0 4.5 4.40 75.4
RBI lending (repo) rate, yr-end, % -7.3 1.2 6.2 4.00 73.5
Rupee to US$1, RBI Ref Rate, yr-end 8.5 8.5 5.0 4.00 76.0