Reading the tea leaves

India’s macroeconomic story since the start of this fiscal has been one of falling growth and inflation — with recent industry forecasts (such as the HSBC’s Purchase Managers’ Index) relieving some of the gloom on the growth front. Even so, few would have been prepared for the latest factory growth numbers — minus 4.2 per cent in October, against minus 1.2 per cent in October 2013 — coming as it does after a relatively more cheerful figure of 2.5 per cent for September. The ‘low base’ points to a dire situation, notwithstanding claims by some analysts that the worst is behind us. The IIP (index of industrial production) has been courting negative territory since January 2012, bobbing up and below the ‘zero’ line ever since then. October 2014 takes us right back to the depths of January-May 2009, after which industry staged a feeble two-year recovery. The consumer price index numbers for November at 4.38 per cent, with food inflation at just 3.14 per cent, are a consolation, but there is no surprise here. The pronounced dip in inflation in recent months is exaggerated by the ‘high base’ effect, or double-digit rates of inflation last year. Besides, it is worth wondering whether the absence of growth and job creation is exerting a deflationary impact.

That said, it should be kept in mind that the factory index is not the most reliable of indicators. Former RBI governor D Subbarao remarked in 2012 that the IIP numbers were “analytically bewildering”. Former finance minister P Chidambaram too has expressed his dismay over wild fluctuations in the past. The issue is to get past the ‘noise’ in the data to know what’s going on. Rather than jump to conclusions on the basis of IIP data, growth data and forecasters’ assessments should also be taken into account to arrive at a more rounded view.

Corporate researchers have observed that while automobiles, cement and metals have shown signs of revival after the first quarter, the same cannot be said for textiles and machinery, hit by sluggish global and domestic demand. Growth data points to a near-stagnation in investment in absolute terms. It has slipped as a share of GDP from 33.3 per cent in the first half of 2013-14 to 32.5 per cent in the first half of this year.

This government has tried its utmost to clear supply bottlenecks, delivering a sentiment-booster for India Inc. But a supply-side push will require support from the demand side. This, however, is not in evidence, at least in agriculture. A downward revision of kharif output is a distinct possibility. Whether or not this pushes up food prices some months later would depend on the government’s supply management. If it succeeds, there would be more disposable income for industrial goods. But the impact of a dip in rural demand on industrial output could be significant. With export demand still fickle, the government must push investment in agriculture to revive manufacturing — while the RBI prepares for a rate cut.

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