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Green shoots or scattered weeds?
NEW DELHI: With 7.9% growth in the January-March quarter, India remains the world’s fastest growing economy, outpacing China’s 6.7% growth in the same period as
NEW DELHI: With 7.9% growth in the January-March quarter, India remains the world’s fastest growing economy, outpacing China’s 6.7% growth in the same period as the neighbouring titan struggles with a crippling industrial deceleration.
Recent data, however, has thrown up mixed trends, suggesting the recovery may not yet be V-shaped.
Industrial activity has been inconsistent. Factory output crawled at 1.2% in May while April saw a -1.3% contraction, hit by a muted manufacturing and consumer non-durables sector.
Infrastructure growth slowed to a fivemonth low of 2.8% in May, down from a four-year high of 8.5% in April.
Comprising eight industries — coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity — this sector is collectively called the ‘core sector’ as it makes up for 38% of industrial production. Conversely, trends from a separate monthly survey showed manufacturing activity has rebounded.
The Nikkei Purchase Managers’ Index (PMI) — which measures industrial activity capturing output to sales brought out by Markit — showed a reading of 51.7 in June, up from 50.7 in May due to strong domestic demand. A reading below 50 indicates contraction in factory output. The upturn is significant when compared to an average 0.5-point decline between May and June over the last decade.
“The domestic market remains the main growth driver as the Indian economic upturn provides a steady stream of new business,” said Markit economist Pollyanna De Lima, who authored the report.
MUTED INVESTMENT
Analysts, however, said the overall economy’s expansion pace could be masking a persistent slowdown in exports and a still-fragile recovery in private investment.
Gross Fixed Capital Formation, a marker for new capacity additions by firms, contracted 1.9% in January-March, highlighting the muted trend in private sector investments and some slowdown in the pace of growth of the government’s capital expenditure.
Capital goods output, often a guide for investment activity, has shrunk for seven successive months. It fell (-)12.4% in May and contracted at an average (-)19.2% between November and April.
Such data could be a pointer to excess capacities — factories have lines of unutilised machinery. This could partly be because companies prefer to sell off unsold stock before restarting their unused production engines.
“In a classical recovery cycle, the demand pulse is first felt in the consumer durables sector. Thereafter, it is transmitted to the basic and intermediary goods sectors before finally reaching the capital goods sector,” Sunil Kumar Sinha, principal economist, India Ratings and Research, said.
“On the positive side, growth was driven by consumption spending (primarily urban demand) and public investments. On the dismal side, private sector interests stayed sluggish amid a challenging external sector. Exports fell 16 straight months to March and offset the benefit from a narrower commodities import bill,” said Radhika Rao, chief India economist at DBS Bank.
PAY BONANZA
Households spending more are early signs of an economy-wide revival. Recently announced salary and pension hikes for central government employees and pensioners, based on 7th Pay Commission recommendations, and plentiful summer rains can potentially set off a cycle of spending and investment.
The 6th pay panel payouts, effective January 1, 2006, had led to a sharp increase in consumer spending. Passenger vehicle sales had gone up 20% in 2008-09 and 22% the next year. “The increase in publicsector wages and pensions should boost urban discretionary demand, particularly for durables like automobiles and smallerticket items like clothing and footwear,” said Sonal Varma. “The pay hike should boost growth, partly offsetting growing downside risks from slower global demand and still-weak private sector investment.”
MONSOON BOOST
An above-normal monsoon could aid economic recovery by raising food output and containing food inflation. When rain-dependent farm output is robust, rural income and spending goes up. This creates demand for manufactured goods, which, in turn, helps the broader economy. For example, 48% of all motorcycles and 44% of TV sets are sold in rural India.
“The expected rise in farm sector income is likely to reinvigorate rural demand in the second half of this fiscal, complementing the boost to consumption from revised pay and pensions for central government employees,” said Aditi Nayar, senior economist, ICRA Limited, a credit rating and research firm.
