Articles in Economonitor - The blog of Roubini Global Economics
India’s IIP for the month of August’12 rose by 2.66% yoy belying the market expectation – the largest increase in the current financial year. The good news, however, ends there as it represents more of a base effect, given that the index value declined to 165.7 from the downward revised 166.9 in July’12. In fact, the downward revision of the previous month’s data resulted in the IIP number showing a contraction of 0.2% yoy as against the initial estimate of a growth of 0.06% yoy. If one strips off the volatility of the IIP data by using the six month moving average (6MMA), the IIP actually shows a contraction of 0.2% yoy in August.
In fact, the better than expected uptick should not be construed as a sign of recovery, given that the trend is clearly downward. As per the data, for the first five months of FY13, the cumulative growth of IIP was a mere 0.4% yoy as compared to a growth of 5.6% yoy recorded during the same period in the previous year.
Interestingly, of late, the PMI numbers are also failing to predict the IIP movements.
Given that the PMI data reflects the sentiments of large businesses while the IIP data captures the entire gamut of business (both large and small), the poor performance of the IIP does indicate the extent of pressure faced by small businesses, which have been most affected by high input inflation and high interest rates.
As per the data, while manufacturing did show a reasonably healthy growth of close to 3%, the index is still trending down and the growth is clearly a reflection of the base effect at play. Ideally, given that India is entering the home stretch of the forthcoming festival period, this is a disappointing number.
The only positive part of the IIP story in the performance of the capital goods sectors. Although capital goods production still contracted (by 1.7% yoy) the capital goods index is showing a healthy trend of slow but steady improvement. In fact, ever since April’12, the index has been moving up continuously.
However, the biggest challenge that India is facing now is a clear slowdown in investment, which is imposing a structural impediment on India’s growth prospects. It is an absolute imperative that investment starts picking up now. To that extent, the performance of the capital goods sector is positive. However, challenges remain. For investment to grow, the overall business climate has to improve. So far, the entire onus of growth revival seems to have been imposed on the RBI while the government has done everything to vitiate the business climate – be it imprudent policy measures or clear failure to bring about fiscal consolidation through unabashed populist spending, which is crowding out private investment. As a result inflation continues to remain high, thereby forcing the RBI to stay on hold rather than opt for a rate cut to spur investment.
I have been an avid blogger. However, regulatory requirements, post my new assignment, has resulted in me taking a break. Wait till I am back.