IIP is back to where it was 12 months ago
While the Prime Minister’s Economic Advisory Council’s (PMEAC) 5.3% GDP forecast for FY14 always looked like a pipe dream, the latest IIP numbers for August suggest the number is likely to be around 4.5-4.6%. After flattering with a 2.8% growth in July, largely due to an inexplicable 15.6% hike in capital goods, industrial growth collapsed to a mere 0.6% in August with capital goods at minus 2%, a number more in keeping with order book positions of firms; consumer goods continued to contract for the fourth month running—non-durables for the ninth consecutive month. The shining star in all of this is electricity generation that grew 7.2% in August, though it is not clear why this generation should be growing given industry is exactly at the same level it was a year ago. Part of the answer lies in extra hydropower due to the abundant monsoon, perhaps making up for the collapse of gas- and coal-based power generation. Barring one month, mining logged in a complete year of contraction, not surprising given the government has not yet been able to convince the courts of the need to lift various bans.
If industry has grown just 0.1% in the first 5 months of the year, and manufacturing contracted by 0.1% in this period, even if industry gets a sharp boost in the rest of the year—and there is no reason for this to happen—this is unlikely to contribute more than 0.3-0.4 percentage points to GDP growth. Even if agriculture grows at 4.5%, thanks largely to FY13’s very poor performance, this will contribute just 0.6 percentage points to GDP, leaving the bulk of adjustment to be done by the services sector.
The problem with services sector growth, however, is that apart from government expenditure, much of this is directly linked to manufacturing sector growth; indeed, the link has got stronger over the years with more manufacturing services being outsourced. According to a Crisil analysis, while one unit of industrial output required 0.36 units of services in 1998-99, this rose to 0.44 units in 2007-08—in other words, an industrial contraction will slow down any services sector recovery. Indeed, most elements of services sector growth are slowing—construction and trade grew at under 4% in the June quarter of the year. While community services, generally seen as driven by government expenditure, rose 9.4% in Q1, this is because government expenditure is being front-loaded—with the fiscal deficit red line likely to become tighter with lower tax revenues thanks to lower GDP growth, this will slow soon. Right now, it seems likely GDP will be worse than it was last year.