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India's economic recovery has entered into a consolidation phase in January 2021, ratings agency ICRA said on Tuesday.

The agency said after the broad-based improvement seen in December 2020, the year-on-year (YoY) performance of a majority of the early available economic indicators recorded a loss of momentum in January 2021, relative to the previous month.

As per the agency, this was led by a combination of factors such as the fading of the favourable base effect, supply-side issues and price hikes.

"A majority of these lost steam in January 2021, relative to December 2020, partly because of an unfavourable base effect, supply-side issues and price hikes, marking a contrast to the improvement in sentiment brought on by the rollout of the Covid-19 vaccines," ICRA's Principal Economist Aditi Nayar said.

"We do not construe the dip in volume performance of a majority of the lead indicators in January 2021 as a sign of alarm regarding the sustainability of the growth recovery. However, we do caution that the pace of underlying growth in the Indian economy remains subdued, and do not foresee a sharp ramp up in the pace of GDP expansion in Q4 FY2021."

According to ICRA, as many as nine of the 15 high frequency indicators recorded a weakening of their YoY performance in January 2021, relative to December 2020.

"This sub-set includes the output of the passenger vehicles (PVs), motorcycles and Coal India Ltd (CIL), vehicle registrations, petrol consumption, ports cargo traffic, generation of GST e-way bills, bank credit and deposits."

"In contrast, six indicators witnessed an improved YoY performance in January 2021, relative to December 2020, namely non-oil exports, electricity generation, rail freight traffic, scooter production, diesel consumption and domestic airline traffic."

Accordingly, the number of indicators displaying a YoY contraction rose to five in January 2021 from three in December 2020, with PV production, vehicle registrations and CIL's output getting added to this sub set.

"The former two reflect supply-side issues related to availability of semi-conductors and price hikes, while the dip in CIL's performance reflects a fading of the base effect. In contrast, the output of scooters recorded a turnaround to an expansion of 11.9 per cent in January 2021 from the contraction of 10 per cent in December 2020, benefiting from a favourable base effect."

"Based on available data, ICRA projects the growth in the Index of Industrial Production to remain muted at 0.5-2 per cent in January 2021. While it expects the technical recession to have ended already, the ratings agency anticipates that the pace of GDP growth, in real terms, will strengthen only modestly to 2.6 per cent in Q4 FY2021 from 0.7 per cent in Q3 FY2021."