India’s macroeconomic picture still not clear
Leading indicators for July released late last week present a mixed macroeconomic picture. This especially holds true when interpreted in conjunction with corporate results for the first quarter of 2016-17. A sample of 1,600 firms analysed by the Business Standard shows that the combined net sales (excluding financial, oil and gas companies) grew the fastest in six quarters. Earlier in the week (9 August), the central bank’s review of economic conditions noted the clouded global economic outlook and sluggish world trade, while striking a more positive note on the domestic side where it flagged the favourable agriculture outlook, a resilient core industrial sector along with some visible green shoots in manufacturing and uplift in business confidence as well as a gradually improving services sector. Supported by an accommodative monetary stance, it expects that the growth momentum will continue with strengthening of rural demand and a wage-driven boost to urban consumption.
Interpreted in this context, the latest macro data readings do not show that economic recovery is gathering force. Industrial output in June increased by 2.1%, year-on-year, following May’s 1.1%. Manufacturing growth too was marginally higher at 0.9% against last month’s 0.7%. Although this means industrial activity held up, it is notably weaker than a year ago—overall industrial growth in April-June 2016 is just 0.6% against a corresponding 3.3% increase last year, while manufacturing contracted by -0.7% compared with its 3.7% growth in April-June 2015.
Disaggregated data shows consumer goods, the expected mainstay of gross domestic product growth, is also growing at a slower pace compared to last year—0.6% in the first quarter of 2016-17 against 2.5% last year. Consumer durables’ growth is the positive spot here, a strong 7.8% relative to 3.7% in April-June 2015. Also, the year-long contraction in non-durables ended in June. Capital goods, which reflect investment demand, fell by 18.0% in April-June 2016, compared to last year’s 2% growth. These trends are worrying even as the pickup in industrial production kept up in the first quarter.
Doubts also arise from July’s trade performance. It shows both external and domestic demand remains weak. Non-oil import growth, a key marker of the strength of domestic appetite for production inputs, is 13.42% lower in April-July 2016 relative to similar levels last year, when it grew by 2.5%. And exports slipped back into negative territory in July (-6.8%) after rising by 1.3% in June. It was assumed the latter signalled a turn from prolonged contraction since December 2014, triggering positive expectations about more improvement ahead.
Further, July’s headline consumer price inflation reading was higher at 6.1% (5.8% in June) and was above expectations. It was not only driven by food as price changes accelerated in other categories as well. Minus food and fuel, core price inflation rose to 4.52% from June’s 4.39%, indicating that decline from May (4.49%) could not sustain.
With these readings, it is difficult to determine a sustained positive trend with a fair amount of certainty. The key driver of aggregate demand at this juncture is consumption and indications on this front are still nebulous. Government spending on infrastructure appears to influence core-industrial activity but knock-on effects do not seem strong enough to spur private business spending. Demand support from a good rainfall and increases in salaries for government employees would be required in that case.
Renu Kohli is a New Delhi-based economist.