There are early signs of a turnaround in industrial activity. Factory output grew 2.7% in August, which is head and shoulders above the 0.4% rate for April-August 2012. Industrial production actually shrank in three of the past five months and the August uptick could be a precursor to the busy season. But it is a long climb out of the trough; the index of industrial production was up 3.4% in August 2011 and 5.6% in April-August last year. Capital goods, a proxy for investments in plants and machinery that build capacities for the future, continued to contract in August — by 1.7%. The cumulative decline over the five-month period is 13.7% after having grown 7.3% a year ago. The combination of tight money and loose government spending that tends to crowd out productive investments in the rest of the economy is still stalking the shopfloor.
Demand for consumer goods is picking up though, which gives the government confidence that the worst may be behind us in manufacturing. Demand for durables in August grew 4%, not far behind last year’s 5.5% and over April-August this segment accelerated to 5.7% from 4.5%. Overall, consumer goods is still trailing last year’s growth but the gap is closing. More than half the industry groups that go into making the index are chugging along reasonably, as are mining and electricity generation. Power output, which has a 10% weight in the index, has grown 4.8% in April-August despite severe coal shortages and overdrawing by states that led to a nationwide grid collapse in July.
The economy may have bottomed out in the first three months of 2012 when the gross domestic product grew 5.3%, the slowest pace during the UPA’s second term. Since then the graph has turned — GDP growth in April-June inched up to 5.5% — and finance minister P Chidambaram hopes the government’s recent efforts to raise the savings rate through a flurry of reforms will turn the country’s investment climate around. The International Monetary Fund, too, expects India’s growth to plunge to 4.9% this year before climbing back to 6% in 2013. Banks have started lowering loan rates, which could be another point of inflection in the Reserve Bank of India’s (RBI) interest rate cycle. The RBI is waiting for inflation to ease before it unwinds its monetary stance and investors have been clamouring for a rate cut. Analysts have begun to see the green shoots of recovery in India’s economic prospects. The factory output data for August ought to bolster their confidence.