The data on factory output for September, indicating a growth of just 3.6% year-on-year (yoy) is disappointing, as it comes off a base of just 2.6% and also compares poorly with August’s robust 6.3% reading. Nevertheless, there could be an industrial recovery of sorts as a 4% growth in the six months to September is better than the 2.9% clocked in the corresponding period of 2014. It would, though, be premature to harbour hopes that it is gaining momentum. It is hard, for instance, to reconcile a sustained recovery with a steep drop in the growth rate of electricity which grew 10.4% in HIFY15, but at only 4.5% in H1FY16.
Also, a sustained turnaround in manufacturing—the segment decelerated to 2.6% in September from 6.6% in August, despite a favourable base—might not come about until the very weak trend in exports reverses; exports have fallen for 10 straight months through to September. Again, the better performance of the capital goods sector—up nearly 8% yoy—should be assessed in the context of the small base of minus 12.5% in H1FY15. As has been the case for some time now, the data comes with its share of quirks. Within capital goods, cable & rubber (part of electrical machinery & apparatus) has been pushing up growth for the past few months. In manufacturing, furniture has grown an incredible 70% yoy. It is encouraging that consumer durables are doing well—up 8.4% yoy—which seems plausible given sales of automobiles have increased 10 months in a row. However, much of this demand seems to be emanating from urban markets; not surprising given this is the second year of consecutively bad monsoons. Higher government-spend in rural areas would help, but more spending will really depend upon investments creating jobs.
The 5% rise in the CPI in October is higher than the 4.4% in September—while that is not alarming, there is reason to be cautious. To be sure, it is the surge in prices of pulses—42% yoy—that has caused the problem because it pushed up food inflation by 5.3%; fortunately, prices of most other commodities remain more or less benign. However, the poor monsoon could likely leave prices of food high, driving up consumer inflation in the next few months to over 5%. That would surely prompt the Reserve Bank of India, which has already frontloaded its rate-cut, to stay put.