The Index of Industrial Production (IIP) grew at 5.8% in September, a sharp fall from the 10.3% print in August. The latest IIP numbers are in keeping with the trend in the Purchasing Managers Index (PMI) for manufacturing, which continues to be in an expansion zone, but has been losing momentum. What is the larger message behind these numbers? Should the loss of economic momentum be a cause for concern? Three points need to be made here.
One of the factors driving relatively muted growth in the past few months is the waning of a favourable base effect. This may hold not just for high-frequency numbers such as IIP and PMI but also GDP figures. To be sure, the RBI governor has gone on record to say that the September quarter GDP numbers could end up higher than the 6.5% projection by the Monetary Policy Committee of RBI. This is in line with analysts saying the Indian economy continues to be resilient despite some loss in momentum.
The second factor is the question of what is driving growth. A use-based classification of the IIP numbers shows that capital goods and infrastructure are leading a growth charge while consumer goods are yet to gain momentum. This, once again, is not a new phenomenon and has been a hallmark of the Indian economy in the post-pandemic phase, which has also seen a sharp increase in central government capital spending. Apart from being a short-term growth driver, government capex is also creating valuable infrastructure for future growth.
Without any prejudice to these first two factors, there is a third point that merits flagging. As long as consumption demand does not gather a sustained momentum, private investment will continue to remain weak. It is the virtuous cycle of precisely these two variables that can put the Indian economy on a sustained growth path that is more than the current 6%-6.5%.
Given that a lot of anecdotal evidence and sales numbers point towards strong demand by the rich, the problem and its solution have to be located at the bottom of the pyramid. The world’s fastest-growing economy must not lose sight of its K-shaped recovery problem.
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