The big question industrial production numbers were supposed to answer was: has the economy bottomed out? To answer that, what is important is not so much the numbers compared with a year ago, but the sequential data compared with the previous month. That data shows industrial production had not bottomed out in December 2012.
Deutsche Bank AG’s Kaushik Das and Taimur Baig say that industrial production declined 0.7% in December from the previous month on a seasonally adjusted basis. Yes Bank Ltd economists estimate that Index of Industrial Production (IIP) growth in December from a month ago, adjusted for seasonality, show a contraction of 0.5%. In short, after adjusting for seasonal effects, industrial production in December was lower than in November.
That suggests the Central Statistics Office (CSO) was right in not seeing any signs of a turnaround. Moreover, its estimates for 2012-13 put manufacturing growth at 1.9%, growth in mining at 0.4%, and growth in electricity, gas and water supply at 4.9%. The IIP numbers show that during the first nine months of the fiscal year, manufacturing has grown by 0.7%, mining has contracted by 1.9% and electricity growth has been 4.6%.
As Care Ratings economist Madan Sabnavis points out, manufacturing will have to grow by 5.3% in the January-March period, mining by 6.4% and electricity production by 6% to reach the CSO targets. Even reaching CSO’s gross domestic product growth estimate of 5% may be an uphill task.
The IIP number for December is at variance with the Purchasing Managers’ Index (PMI) for manufacturing, which had risen to a five-month high in December 2012. Perhaps this divergence can be explained by the fact that while PMI survey data is from large companies, the IIP numbers include smaller firms. The Reserve Bank of India numbers show that in the current fiscal year till end-December, while bank credit to large companies grew by 9.2%, it contracted by 1.8% for medium-sized firms and went up by just 4.8% for micro and small companies.
The Organisation for Economic Co-operation and Development composite leading indicators for December 2012, released last Monday, said that the indicators for India and China “point to growth below trend compared with more positive signals in last month’s assessment”.
The December IIP numbers also show the broad-based nature of the slowdown, which is now no longer limited to capital goods, but has affected consumption as well.
The slowdown in industrial growth has not been accompanied by lower inflation. Both the consumer price headline inflation as well as core inflation (ex-food and fuel) were higher in January than in December.
The writing on the wall is clear. Growth is being affected by supply-side constraints. For instance, the manufacturing PMI for January clearly shows that the lack of power supply has hit output. But the same constraints will keep inflation high and limit the central bank’s ability to ease monetary policy.
And, as Royal Bank of Scotland NV economist Gaurav Kapur points out, the same structural factors, such as shortages in oil, coal and the propensity to import gold as a hedge against inflation, will keep the current account deficit high, despite slowing growth.
In short, the time for quick fixes is long past and trying to stimulate the economy by boosting consumption will be counterproductive. Structural reforms can be put off no longer. If it is to make any impact at all, the budget must address this underlying problem.