×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

They continue to spend

They continue to spend
Comment E-mail Print Share
First Published: Thu, Aug 14 2008. 01 15 AM IST
Updated: Thu, Aug 14 2008. 01 15 AM IST
There is a surprise in the industrial growth figures for June released on Tuesday.
The overall year-on-year growth of 5.4% was close to what economists had forecast. No surprises there. But the data on the components of industrial growth do show something interesting. Growth in the production of consumer goods has held up quite well even as growth in production of capital goods has been weak. The former is growing almost twice as fast as the latter. This suggests that consumption is still running strong in the economy while investment in new factories and infrastructure projects is faltering.
This flies in the face of the usual assumption that higher interest rates would pinch consumers. What’s up? One possibility is that the monetary tightening by the Reserve Bank of India has been nullified till now by increased government spending. The income tax cuts announced in the Union Budget, the farm loan waiver and the promise made to civil servants that their salaries would be hiked have most likely encouraged them to spend in the markets and malls.
Meanwhile, high interest rates have clearly hit home purchases (this is also evident from bank lending data) while public and private infrastructure projects are being delayed. All this is perhaps affecting the demand for capital goods. There are, however, few signs from companies that they are holding back investment plans because of the slowdown and high borrowing costs.
We have often argued in these columns that the government’s fiscal profligacy is making the central bank’s monetary tightening less effective. Demand growth is still strong. The relative underperformance of capital goods is not necessarily good news for the economy, which needs more investment in productive capacity. Many companies are already operating near full capacity and demand pressures will fuel inflation.
The stock market seems to have guessed this shift before the rest. Notice how “defensive” consumer goods companies have done better than the overall market index while capital goods have seen sharper falls than the index.
Wisdom of the investment crowds?
Is consumption holding up the economy? Write to us at views@livemint.com
Comment E-mail Print Share
First Published: Thu, Aug 14 2008. 01 15 AM IST