For an economy that appears headed for its worst growth in a decade, the latest Index of Industrial Production (IIP) data comes as a pleasant surprise. The millions of factories peppered across India produced 8.2% more output in October as compared with the same month last year. Seen in isolation
this data would, ceteris paribus, imply that the Indian economy has turned the corner. Yet, the time to open the bubbly may still be a few months away. A few caveats may be in order: The growth in the index of industrial production - the closest approximation for measuring economic activity in the country's business landscape - jumped sharply in October primarily aided by 9.6% growth in manufacturing and 16.5% in consumer durables. The main surprise came from the latter and not from the capital goods side, which grew at 7.5%, something which may suggest that the big surge is more seasonal demand related than any incipient turnaround in investment. Growth in consumer durables' output, which clocked a 20-month high in October, clearly mirrors an annual trend of greater spending on television, refrigerators and cars every autumn during festivals.
Households putting off spending are early warning signals of an economy-wide squeeze. The clearest indications are available in any market or mall. The fact that automobile sales slumped again in November to 1.3% versus 13% in October supports the view that the jump in consumer durables growth may not be sustainable. Erosion in purchasing power, on account of persistently high inflation and interest rates, is denting discretionary spending. Besides, one needs to be careful about hastily fitting a trend, for hiding behind reams of numbers is an occurrence called the "base effect"- a statistical phenomenon that makes the speed of change look high compared to a previous period of low growth, although the real increase may not be very large. That factory output contracted 5% in October last year, may partly explain the giant leap in factory growth numbers.
These cautions aside, hopes of a recovery in the broader economy have sprung anew in the wake of the latest set of numbers. All eyes will now be on the Reserve Bank of India (RBI) on whether it will sprinkle water on these little green shoots by slashing interest rates next week. The RBI uses monetary tools to stymie demand and cool prices. The tug-of-war between sliding growth and rising inflation - which has forced the RBI to keep interest rates high - has hurt consumption demand, a strong edifice of the India growth story. But, on the other hand, India's overall consumer price inflation - a more realistic cost-of-living measure because it captures shop-end prices - is again nudging uncomfortably close to double digits. So far the RBI has withstood mounting pressure to reduce borrowing costs and prod consumer purchases and corporate investment. The jury is still out on how it will react to the latest set of macro numbers.
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