By Dhruv Rawani
Results of three key statistics, which are tracked by analysts for analyzing the state of the economy and forecasting the future, were released by the CSO. As per the data, MOPSI—the Index for Industrial Production (IIP) rose 7.5% in January from 7.1% in December. On the inflation front, both the consumer price Index (CPI) and the wholesale price index (WPI) cooled down to 4.44% and 2.48% respectively in the month of February.
Revival in industrial production
IIP, a monthly index, is a statistical tool used to measure growth in the industrial productivity. The index is made of various sectors selected from the Annual Survey of Industries 2004-05 and is calculated by the CSO. The index tracks the production in the manufacturing sector which is divided into 23 categories like mining and electricity. Apart from the Purchase Manufacturing Index (PMI), IIP is the only broad-based statistic for tracking manufacturing in India.
The index for the month of January pointed towards a third successive month of 7% plus growth (MoM). The growth for the month was driven by the growth from manufacturing and electricity sector. Among the manufacturing sector, all the industries ranging from textiles to automobiles production contributed to the growth. The higher monthly sales recorded by the automobile industry forms a proof of the higher growth rates recorded by them in the IIP data. Manufacturing of refined petroleum products; which carries the second highest weight in the index, recorded a growth of 11.5%. The higher growth recorded by the manufacture of capital goods points towards a revival in the economy.The sector recorded a growth of 14.6% against a flat growth last year. In the capital goods space, manufacture of trucks and lorries delivered the highest growth. Apart from the transportation and automobile sector, the pharmaceutical and chemical industry recorded a growth of 22.3%.
WPI & CPI inflation cooldown
The CPI inflation fell below the 5% mark to 4.4%, slightly below the estimates of 4.8% by the analysts. The cooldown was primarily led by food products, which carry the highest weight in the index. The food index for the month of February grew at 3.7% YoY, far below the 4.7% recorded in the previous year. Apart from the food index, even fuel and light recorded lower inflation for January. However, it was set off by the increase in clothing and footwear industry.
It was not only CPI but also WPI which recorded a modest increase of 2.48% for the month of February against 2.84% recorded in January, and half of the 5.51% recorded a year earlier. Similar to CPI, the decrease in WPI inflation was largely driven by the cooling of food prices which decreased from 1.65% to 0.07%. However, it is worthwhile to note that unlike CPI, food index constitutes only a quarter of the WPI index.
Revival of industrial production
The fact that sixteen of the twenty-three industry groups in the manufacturing index of IIP recorded a growth is encouraging. However, only by comparing them with other industrial statistics can we determine if they actually point towards a revival in the economy. As mentioned above, the highest growth in the IIP production was recorded by the automobile sector as a whole. A correlation of the number with the sales figures of leading automobile companies reveals that indeed there has been growth in the production of automobiles. The motor vehicle sales had recorded a growth of 30.7% in the month of January. Further, even the petrol and diesel consumption recorded a healthy growth of 15.6% and 14.5% respectively in the month of January.
For the month of February, the highest contributor to the IIP index was the manufacture of bodies of trucks, lorries and trailers which recorded a growth of 267.5% over the previous month. Unlike passenger vehicles like cars which are manufactured for consumption, commercial vehicles, like trailers and trucks are used in the industrial sector and are part of the manufacturing process. Automobiles, in general, have been considered to be one of the lead indicators for the economy. A pick up in the manufacturing of these commercial vehicles points towards a gradual revival in the economy.
Another promising indicator for the industrial recovery was that capital and infrastructure goods bagged the top two slots in contribution to the growth in IIP when the categorization is done by type of goods. The two segments have recorded three months of consistent growth, which is a strong indicator of a boost from the slack in production which has plagued the industrial sector at large.
A closer look at the third quarter results across industries would also point towards the revival in the economy. Among BSE 200 companies, the industrial sector which comprises of cyclical sectors like energy, utilities, commodities, cement, industrials and telecom reported a growth of 16.8% increase in Profit After Tax (‘PAT’) YoY in Q3 of the current year.
Global growth revival to aid India’s growth
On a consolidated basis, ex-financials BSE 200 sales, EBITDA and PAT recorded a growth of 10%, 19% and 11% respectively. The analysts expect the profits of BSE 200 companies to grow at 19.5%, which would primarily be driven by the cyclical sectors mentioned above which are expected to show an earnings growth of 24%. The industries which are classified as cyclical, are primarily the growth drivers which will lead to a revival in the industrial production driving the GDP higher. The reported and projected numbers of this set of industries certainly point towards the fact that the worst is behind us.
The International Monetary Fund (IMF) has predicted a 3.7% global growth for 2018 after reporting a 3.6% growth in 2017. China and India have a significant weight in the global growth with the contribution of China matching the growth of advanced economies. However, an increase in global growth aids the economies of these countries as well as it helps in increasing exports driving their GDP higher. While World bank has predicted a 7.3% growth in GDP for the year 2018, the same comes with caveats in the form of policy decisions and positive outcome of reforms undertaken by the government over the past few years. While the international organization expects China to deliver flat GDP growth rates, it expects India to deliver the highest GDP among the emerging economies.
Red flags may mar the green shoots of the economy
While the set of numbers pointed out above look quite encouraging, it is important to understand that they are comparative in nature. They carry the limitations of base effect. Over the past year, the economy had to absorb the twin shocks of demonetization and Goods and Service Tax (GST). Both these policy decisions have had a substantial impact on the revival of industrial production. With numbers over the previous years of the reported statistics remained muted due to the twin shocks, the latest numbers benefit from the low base effect of these numbers. The flat inflation growth recorded by the manufacturing sector in the WPI inflation index points towards a constraint on the part of the manufacturers to pass on the higher costs of raw material onto the buyers due to muted demand. Further, CPI inflation is expected to rise over the coming months due to higher food inflation which is usually reported over the summer. The monsoon forecast shall also play an important role in determining whether the inflations stays at the targeted level of 4% set by the Reserve Bank of India.
However the fact that, the economy was able to grow at a healthy rate of 6.7% over the past year, positively point towards the bottoming out and resilience of growth in the Indian economy.
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