There are two strong markers in the latest national income data that show that the Indian economy may have turned the corner. First, the manufacturing sector, which accounts for two-thirds of India’s total industrial output, appears well within striking distance of clocking double-digit growth. At 9.3% in the quarter-ended September 30, the manufacturing sector seems in a revival mood. This could get better, riding on festival season purchases and spending induced by higher salaries that government employees are expecting from January 1, 2016. Second, there are signs that investments may have picked up pace. Gross fixed capital formation, a proxy to measure investment activity, has grown to 30.1% of GDP. Capital goods production grew by 10.5% year-over-year in September, and as credit rating agency Moody’s has pointed out, the 6-month moving average of capital goods output growth showed sustained improvement. If sustained, this cycle of spending and investment can trigger strong multiplier effects across the economy.
Sustaining these fledgling signs of economic recovery would, however, depend on how the government accelerates its pace of investment. RBI governor Raghuram Rajan has underlined this symbiotic relationship between public and private investment in the monetary policy review on Tuesday. The central bank is of the view that there were clear signs of companies reporting strong decline in built-up inventories, particularly for finished goods. Not all pointers though are as bullish. Two years of back-to-back droughts appear to have hurt farm incomes, which is apparent in shop-end data in villages.
The construction sector grew by a modest 2.6% in July-September from 6.9% in the previous quarter. A separate set of data also showed that revival in India’s eight ‘core’ infrastructure sectors was wobbly. There still appears to be large levels of under utilised capacity in the private sector. The government now needs to hasten the pace of implementation of infrastructure projects. Greater public investment, besides pushing income growth and creating jobs, can also ‘crowd in’ in private investment to buoy the broader economy.