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Is the economy on the road to recovery?
Thu, 14 Jul Pre-Open

Industrial production is a measure of output of the industrial sector of the economy. The Index of Industrial Production or IIP is an important tool for forecasting future GDP and economic performance. IIP figures are also used by central banks to measure inflation.

IIP grew by 1.2% in May 2016 after seeing a contraction in the previous month, mainly due to an uptick in consumer durables output which grew by 6%. However, the cumulative growth for the period April-May 2016 over the corresponding period of the previous year stands at negative 0.1%.

It is important to look at some important items that have registered high positive growth. This includes Di-Ammonium Phosphate (DAP), Aviation Turbine Fuel, Air Conditioner, and Scooters and Mopeds. These items grew by 59.3%, 48.2%, 38.6%, and 32.1% respectively. Similarly, items showing high negative growth include Cable Rubber Insulated, Sugar, Cement Machinery, HR Sheets. These items have registered a negative growth of 89.8%, 69.1%, 48.5% and 39.9% respectively.

The production of capital goods, which is an indicator of investment activity, registered a negative growth of 12.4%. This indicates capacity utilisation is at low levels and there is no visible confidence on demand picking up. It is unlikely that a sustained improvement in capex will happen.

The IIP for the Mining, Manufacturing and Electricity sectors grew by 1.3%, 0.7% and 4.7% respectively. The growth in manufacturing remains subdued and is a cause for concern. The weak consumer and investment demand points to the fact that the recovery is going to be slow in manufacturing.

This indicates Industrial recovery will remain sluggish in the near term. However, once the impact of the monsoon sets in by the third quarter, along with that of the seventh Pay Commission, there might be some improvement in the consumption. It is important to note that Investment activity will not revive unless consumption demand improves.

To start the ball rolling, the government has stepped up its public spending. Reportedly, the Plan expenditure in the first couple of months of FY17 stood at Rs 900 billion. This was the highest in the last five years. The expenditure for the full year is estimated at Rs 5.5 trillion, a 15.3% increase over the budgeted target of last fiscal. The government is also set to launch a mega irrigation fund even as the state government in Maharashtra is planning infrastructure funds to bolster special infrastructure projects. These initiatives are likely to yield results only in the long run.

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Mar 21, 2018 12:37 PM