Why India's economic growth remains a worry

Call it post-Diwali blues, if you will. After a robust 9.9 per cent rise in October, industrial output as measured by the index of industrial production (IIP) contracted 3.2 per cent in November, giving rise to fresh worries about the state of the economy.

It also doesn’t help that food price inflation remains elevated, mostly due to high prices of pulses, a result of two consecutive years of sub-par monsoon. The consumer price index for December 2015 climbed 5.6 per cent, on a year-on-year basis, with consumer food price inflation rising 6.4 per cent.

But inflation is less of a worry for policy makers than the contraction of the manufacturing sector.

Both 9.9 per cent expansion of industrial output in October, as well as the 3.2 per cent contraction in November, were unexpected.

Economists say the October expansion was anyway unsustainable but contraction in November was surprising. Perhaps, it was due to the unprecedented and excessive rains in Tamil Nadu and other parts of India’s east coast.

Tamil Nadu has the largest base of organised manufacturing units in the country. If indeed, it was the Tamil Nadu effect, then December output too would have suffered as rains had continued till middle of that month.

One thing is clear, as chief economic advisor Arvind Subramanian wrote in the mid-year review, challenges to growth persist, and it will continue to hurt the Indian economy in 2016-17 as well.

The IIP, an indicator that tracks the level of manufacturing, mining and electricity output in the country, shows that it was the capital goods sector that contracted the most in November, about 24.4 per cent, from a year ago. Most of that contraction was due to decline in output of machinery and equipment, and transport equipment for the commercial sector.

Output of tractors, for instance, shrank over 42 per cent in November due to poor demand from farm sector due to failure of monsoon. Such sharp contraction of the capital goods sector is worrying for the economy - it signals that investment in new projects is at standstill or on decline.

It also means that demand is far lower than what factories are capable of supplying, and therefore, businesses do not see any need to expand capacity.

It is also worrying for jobs - even though number of jobs created by the manufacturing sector is small due to automation, lack of new investment means new jobs will not be created.

Amid the gloomy outlook for capital goods, there was some positive news from the consumer goods sectors, comprising passenger cars, two-wheelers, all kind of household appliances and other durable goods. This could be because the period from November to mid-December was considered as an auspicious time for weddings.

While the output of these industries was higher than a year ago (same month) , it was 17 per cent lower than the levels achieved in October.

Clearly, manufacturers were unsure of piling up inventory, given that the demand from rural areas had disappeared following two seasons of failed monsoon. Production of passenger automobiles had been tapered down after Diwali, as automobile companies do not like carrying forward inventory into a new calendar year.

There was some good news from the gems and jewellery sector too - the nearly 254 per cent growth in November from a year ago. Again, it could be driven by the festival and wedding season in the domestic market and some bit of Christmas orders from overseas. Gems and jewellery, including gold jewellery is among top exports from India, and also a major employer.

The volatility in industrial production is worrying but it may be here to stay for many more months, given the slow growth of global economy, and particularly the slowdown of China, and India’s owns problem caused by two consecutive years of poor monsoon.

Only a good spell of rain across the country during 2016 monsoon season can revive the rural demand. Yet, the crash in global prices of petroleum crude oil and other commodities, such as various metals including iron is an opportunity as it brings down costs for Indian companies.