Volatile production data sends confusing signals

Volatile production data sends confusing signals

New Delhi: Contrary to ground-level signals that the Indian economy is slowing, the government data continues to show robust numbers, sending confusing signals to policymakers as well as analysts.

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Data released on Friday showed June factory output grew at an unexpected 8.8% compared with the consensus 5.8% forecast by analysts for the Index of Industrial Production (IIP), mostly due to the volatile capital goods segment, which shot up 37.7%, the most in 16 months.

Commerce ministry data on Thursday showed merchandise exports growing at 82% in July, the highest in at least 16 years.

Tax collection data also released by the finance ministry shows robust growth. Gross direct tax collections for the first four months of the current fiscal (April-July) on Friday were up 26.63% to 1.32 trillion. Indirect collections in April-June grew 27% against the 15% target for the fiscal year. However, growth in indirect tax collections moderated in July to 16.4% from 25% in June, as the impact of duty cuts on petroleum and other crude products in June kicked in.

A set of data from private agencies such as the widely tracked HSBC Purchasing Managers’ Index showed India’s manufacturing growth fell to a 20-month low in July due to rising input costs.

Auto sales for July released by the Society of Indian Automobile Manufacturers fell for the first time in nearly three years by 16% due to rising interest rates and higher fuel costs.

D.K. Joshi, chief economist at Crisil Ltd, said there was a disconnect in the data. “However, we have to live with it. Maybe we have to look at a little longer-term data," he added.

He said the latest industrial growth is clearly above the trend growth rate and is not sustainable in the current high interest rate scenario.

Reserve Bank of India (RBI) governor D. Subbarao said in July that poor quality data could be potentially misleading, referring to the high volatility in IIP data, terming it “analytically bewildering".

“It is important for policy purposes to determine whether the root cause of such behaviour is the production decisions in the wake of uncertainty or whether it is due to the compilation process," the governor said at the time.

In uncertain times, different indicators usually show varying trends, said Samiran Chakraborty, Standard Chartered Bank’s head of India research. “In such a large country, with so much of diversity, different sources of data will show divergence," he said.

Rajeev Malik, senior economist at CLSA Singapore Pte Ltd, wrote in a note that significant volatility has been a disturbing feature of India’s monthly industrial production data often because of the wild swings in the capital goods sub-sector.

“Capital goods are by nature a volatile category, but the magnitude of its swings in recent months has been bizarre," he said. “It is in this context that the significantly better-than-expected IIP growth of 8.8% y-o-y in June appears less scintillating."

Finance minister Pranab Mukherjee termed the factory output data encouraging. “If this trend continues, it will give a boost to growth," he said.

Planning Commission deputy chairman Montek Singh Ahluwalia said: “I am glad that the latest figures show improvement. I think it is broadly along the lines that we have been talking about for the current year."

RBI deputy governor Subir Gokarn said at an event organized by the Confederation of Indian Industry that the June IIP numbers indicate that moderation in economic growth is not broad-based. He said the central bank would also take into account various other factors before deciding on whether to go for further rate increases.

“We have been tracking other indicators as well. The first-quarter performance of corporate results are in. We will do some detailed analysis of that looking at credit flows...ultimately, the decision would be based on all of these inputs taken together. One number here and there is not a decisive number," Gokarn said.

A survey conducted by RBI during the June quarter released on Thursday showed household inflationary expectations remain stubbornly high even after the central bank increased policy rates 11 times since March last year.

Analysts said it is too early to say whether RBI will pause, given the volatile global scenario.

Apart from global developments and the sustainability of softer commodity prices, Malik said RBI’s next monetary policy announcement will be influenced by inflation, gross domestic product and factory output among other data.

While the ongoing turmoil in the financial markets clearly requires some defensive thinking on the part of the central bank, it is perhaps too early to say if RBI will call it quits in this cycle in September, Taimur Baig and Kaushik Das of Deutsche Bank AG said in a note.

“If commodity prices do not ease considerably, the central bank will have a particularly hard time to call off its inflation fight," they said. “In our view, the probability of a rate hike in September has declined considerably, but it is too early to say it has become trivial, regardless of what the market interest rates are suggesting."

Crisil’s Joshi expects RBI to raise the policy rate by another 25 basis points in September, given the high level of inflation.

The June factory output data showed manufacturing grew 10%. While the mining sector grew at a meagre 0.6% due to delays in environmental clearances, electricity production remained buoyant at 7.9%. Growth in consumer goods sharply decelerated due to the moderation in consumer durables, which grew 1% against 21.2% a year ago.

Fifteen out of the 22 industry groups in the manufacturing sector showed positive growth.

Graphic by Sandeep Bhatnagar/Mint


PTI contributed to this story.