Key numbers show economy is finally turning; here’s how to read them

A Purchasing Managers’ Index number above 50 is indicative of economic expansion. This means that manufacturing is picking pace but jobs remain a concern.

Saturday’s numbers around the Index of Industrial Production (IIP) – a measure of economic activity – suggest the economy is finally turning. On an annual basis, the index expanded 11.5% in July. Over last month, it grew 7.2%. In other words, the metric continues to grow and is now at pre-pandemic levels.

How much factories raise output of goods by – that’s is an important dipstick for many other indicators. (Bloomberg file photo)

First off, what is the IIP and how good a measure is it of economic growth?

The IIP is a composite indicator. It’s a number, and the rate at which that number increases, expressed as a per cent, measures short-term changes in the quantity of production of a basket of industrial products during a given period.

How much factories raise output of goods by – that’s is an important dipstick for many other indicators, such as demand, people’s spending levels and future demand. Demand can only pick up when consumers get access to money, either as income or credit.

The IIP measures sub-indices for primary goods (for instance, bread), capital goods (machinery), intermediate goods (say, a mobile-phone chip) and infrastructure and construction goods (like cement). Further, the sub-indices also measure the output of consumer durables and consumer non-durables. Manufacturing is a key sector tracked.

For instance, the latest data show that consumer durables output rose 19.5% in July on a month-on-month basis. This is a slowdown from a rise of 31.2% in June but confirms that white goods continue to be in expansion mode.

These are signs of factories humming again. The abatement in Covid infection rates are the biggest reason for the uptick, and barring another wave, things should look good.

However, the green shoots continue to mask the underlying weaknesses from a Covid double blow. About 2.5 crore rural households demanded unskilled, menial jobs under the make-work rural jobs guarantee programme, MNREGA, in August, official data show.

The government was able to provide paid work to only 1.6 crore households under the programme, which points to a lack of enough supply of jobs (funding) to meet demand.

A proprietary gauge of manufacturing activity in August fell, compared to the previous month, suggesting industrial output has yet to stabilise. The IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) came in at 52.3 in August, compared to 55.3 in July, an IHS media statement said. A PMI number above 50 is indicative of economic expansion. This means that manufacturing is picking pace.

An area of concern is employment. Unemployment in August rose 8.32% from 6.95% in July, according to the Centre for Monitoring Indian Economy or CMIE.

Mounting unemployment will pile more pressure on the Modi government if economic expansion doesn’t correlate to more jobs, which is not always the case.

In any jobs survey, people with jobs are categorised as employed. People without jobs but looking for work are considered unemployed. The labour force participation rate is simply equal to people who are employed plus people who are not employed.

In a rough-and-ready sense, the unemployment rate is then simply the number of unemployed divided by the total labour force times 100.

Capital-intensive growth, for instance, a scenario where automation drives profits, can lead to fewer jobs being added to the economy.