During the eight months of this fiscal year so far, the Index of Industrial Production (IIP) growth has averaged just 0.6 percent as compared to 5 percent average growth in the same period the previous fiscal.
The overall economic growth has been disappointing so far. It will take a few more months to understand whether the uptick in the November factory output indicates the beginning of a revival trend.
Of course, it is indeed positive news for the stock markets that after three months of contraction, the IIP for November has shown a growth of 1.8 percent. But economists attribute this recovery partly to the lower base in the corresponding month of the previous year.
Also, note that the major segments that should show use-based activity--consumer durables, capital goods, basic goods, and infrastructure goods--are still showing de-growth.
In a note, rating agency Care said, “Growth during the month has largely been aided by the low base effect which pushed up the growth in the manufacturing sector. Capital goods and infrastructure continued to see contraction during the month on account of weak investment climate and subdued consumer demand in the economy.”
How has the base effect played out on manufacturing? In November 2018, the growth in the segment contracted by 0.7 percent compared with 8.2 percent growth in October of last year. The index fell from 133.9 to 126.8--a sharp fall. On this lower base, November 2019 growth appears to have shot up by 2.7 percent as compared to a contraction of 2.3 percent in the preceding month.
Capital goods, which indicate the investment activity continued de-growth in November, this time by negative 8.6 percent, although the de-growth has narrowed from negative 22 percent in October. The trend is same on electricity and consumption.
While a growth figure after three months of contraction accompanied by a favourable Purchasing Manager's Index (PMI) number is indeed encouraging, the underlying economic activities continue to be weak.
In 2019, the country’s auto sales grew the lowest in at least 20 years, indicating the subdued consumer spending activity and economic slowdown. The Reserve Bank of India (RBI), which has cut its key policy rate by 135 basis points so far in this rate cycle, might wait for a few more months to form an opinion on the growth revival as it has been commenting in the past policies. Some economists have opined that the central bank could do one more rate cut to deter banks from parking money in government securities.
Recovery in the Indian economy, which is projected to grow just 5 percent this fiscal year, will depend heavily on how the government spend pans out in the fourth quarter. Private investments have lagged in this fiscal with investors wary to put money on the table in a slowing economy. Growth in private consumption, in the second quarter, grew by just 7.8 percent compared with 14.4 percent in the comparable quarter of last fiscal. Compared with this, the government consumption has stayed at nearly similar levels of 15-18 percent in the last 12 months. The onus is on the government to support growth.
(Data support from Kishor Kadam)
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Updated Date: Jan 11, 2020 11:23:51 IST