Given how data on factory output has had its share of inconsistencies, to put it mildly, re-casting the series with a more contemporary base of 2011-12 was always necessary. The new series has been constructed with changes not just in the composition and size of the basket of goods but also an alteration of the weights. So, consumer durables, for instance, get more play now while the consumer non-durables segment, or what is typically FMCG, is relatively less important.
The ever-volatile capital goods segment now captures work-in progress rather than work completed while the total basket now comprises some 839 items making it far more representative than before. Given how much more relevant the index is now, it isn’t altogether surprising IIP grew at a consistently higher pace between FY13 and FY17; the average rate was 3.8%, more than twice the pace projected by the older series of 1.4%. The difference for 2016-17 is even more stark; factory output did not crawl at 0.7% but clocked a fairly brisk 5%. And if factory output has been chugging along nicely—even if wasn’t galloping as it did prior to 2010-11—it means GDP too has not been doing badly either.
However, what’s worrying and somewhat hard to reconcile is that despite the better growth momentum, virtually no jobs have been created in the last few years. Anecdotal evidence suggests very little increase in employment opportunities; much of this has been in the services sectors such as e-commerce. On the contrary, manufacturing or engineering companies have trimmed their workforces, partly due to increased automation and also because there’s surplus capacity of around 20-25%. Larsen and Toubro for instance let go off around 5,000 people. Clearly, a 5% increase in the industrial sector isn’t enough to kick-start the job market.
Perhaps, this has something to do with the moribund capital goods sector, output of which contracted 1% year-on-year in March, the fourth consecutive contraction. Also, given the economy wasn’t really in the kind of slump we thought it was, it is surprising there wasn’t a little more spunk in corporate earnings. To be sure, the steep fall in commodity prices and two consecutive droughts hurt earnings badly and, moreover, services are the bigger chunk of the economy.
Nevertheless, that aggregate profits—for a fairly robust sample of nearly 2,200 companies—either shrank or grew modestly on most quarters of FY15, FY16 and FY17 is worrying. What this suggests is that growth needs to move to a much higher trajectory for the job market to pick up. Unfortunately, demonetisation appears to have hurt the economy: factory output in Q4FY17 grew at just 2.8% y-o-y, slower than the 4.4% y-o-y in Q3FY17. Unless the construction sector gets going, it’s hard to see where the jobs are going to come from.