Three recent data sets suggest that an industrial recovery is under way. The Nikkei India Purchasing Managers’ Index (PMI) hit a 22-month high; car sales have improved significantly over the last fiscal; and non-food credit, which accounts for over 80 per cent of total credit disbursed (about ₹64 lakh crore a year), increased by 3.2 per cent in March-September 2016 (10.8 per cent in September alone), against 1.6 per cent in the last half of last year (8.6 per cent in September 2015). The PMI increase, though confined to 500 corporates, points to a higher rise in net sales between July and September over the previous quarter — a trend that was confirmed by an analysis of Q2 results of 510 corporates done by this paper. As for the auto sector, four-wheeler passenger vehicle sales grew 12.3 per cent in April-September this year, against an increase of just 7.2 per cent for the whole of last year. Motorcycle sales improved 12.7 per cent in the first half of this fiscal, as against being almost flat in 2015-16.

Even so, it would appear that the current industrial spurt has been propelled more by urban than rural demand. This is borne out by the indifferent performance of the FMCG sector. Services and personal loans (which account for 45 per cent of total credit) have propelled the rise in non-food credit, growing by 7.7 per cent and 7.5 per cent, respectively, in the first half, softening the impact of sluggish credit to industry, which accounts for another 40 per cent of the total pie. In sum, urban demand has driven this revival of sorts; the effects of a successful kharif season will become evident in the second half of this fiscal. What is playing out now is the Pay Commission award, specifically the January-July ‘arrears’ (possibly about ₹50,000 crore, or half the annual increase in employees’ salaries) paid at one go. While the lumpsum amount will have pushed big-ticket consumer purchases, credit-based buying of houses and consumer goods on the basis of a rise in future incomes may continue. This will help improve capacity utilisation, even as the payouts from State governments will take time to come into effect.

The narrowing gap between the wholesale and consumer price index is a pointer to a rise in industrial activity. But it will take some time for investment demand to pick up. Investment, which has been sluggish for five years, can be expected to grow when capacity utilisation in industry rises from current levels of about 73 per cent to above 85 per cent. With capacity utilisation still low and commodity prices benign, the Centre can afford to step up spending in infrastructure without worrying too much about inflation. Crucially, banks, which have been cleaning up their books for the past few quarters, should now be in a better position to step up lending to industry. The Centre and States need to do their bit to sustain momentum by stepping up productive expenditure on capital assets.

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