Has the Indian economy weathered the effect of demonetisation, GST introduction?
First, consider the Reserve Bank of India’s (RBI’s) Consumer Confidence Index, which should give an idea of the strength of consumer demand. Chart 1 shows the index fell sharply after demonetisation, but clawed its way back to the neutral 100 mark by May 2017. A reading above 100 denotes optimism, while one below 100 indicates pessimism. The index started falling again after the introduction of the goods and services tax (GST). It has improved in December, the latest RBI survey date, but is still below 100 and well below the level of May 2017. What the survey shows is that consumer confidence is off its lows, but hasn’t fully recovered from the twin blows.
The growth of 7.1% from a year ago in industrial production for December 2017 is certainly an improvement. Since the year-ago period was on a low base due to demonetisation, it’s best to look at month-on-month values of the index, which shows 3.3% growth in December 2017. That is positive, but Gaurav Kapur, chief economist at IndusInd Bank Ltd, points out that it’s well below the average of the month-on-month growth in December in previous years. That fits in with the consumer confidence data—growth is picking up, but at a slow pace.
However, the IIP (Index of Industrial Production) numbers also show a sharp rise in the production of capital goods. The capital goods index for December 2017 is up 11.4% in four months. As another story on this page shows, this is probably due to the return of brownfield expansion.
The puzzle is the anomaly of digestive enzymes and antacids contributing 2.25% out of the 7.1% growth in December and this category has all along been a major contributor to growth, according to the new IIP data. It’s rather hard to believe, to put it mildly. That’s not all—the press release says that “API & formulations of hypo-lipidemic agents incl. anti-hypertriglyceridemics (e.g. simvastatin, atorvastatin, etc); anti-hypertensive” category grew by 250.4% in December. If all this is indeed true, India’s growth seems to be fuelled by drugs.
Be that as it may, the pickup in growth has been accompanied by a rise in core inflation (Consumer Price Index (CPI)-based inflation ex-food and fuel), although headline inflation for January was in line with expectations. Chart 2 has the details.
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