Three reports coming in the last week, two from the government and one from the RBI have reminded us of the problems of reconciliation of macroeconomic data put out by different agencies regarding the direction of the economy.
The RBI, on Sept 10, 2016 released its monthly bulletin for September 2016, while the government on September 12 released its Quick Estimates of the Index of Industrial production (IIP) for July 2016, as also its estimates for GDP for the first quarter (April-June) 2016-17.
The Quick Estimates of IIP present a damning picture of industrial growth, despite the government’s clarion call for ‘Make in India’. The General Index is 2.4 percent lower compared to its level in the previous year, while its cumulative growth for the period April-July 2016 on year was (-) 0.2%. More importantly, it was the manufacturing sector that seemed to have exhibited the worst performance, with a (-) 3.4 percent growth rate compared to July 2015. The industry groups ‘Electrical machinery and apparatus’ and ‘Medical, precision and optical instruments, watches and clocks’ exhibited large negative growths of (-) 59.2 and (-) 16.8 per cent respectively.
Use-based classification confirmed this picture of (-) 29.6 per cent growth of capital goods, with high negative contributors being rubber insulated cables; marble tiles and slabs; HR sheets; sugar machinery; sealed compressors and rice.
Compare this picture with the GDP growth numbers put out by the government on August 31, 2016. Voila, magic! The manufacturing growth numbers for April-June 2016 seem to be a robust 9.1 per cent compared to 7.3 per cent in the previous year. Electrical, gas, water supply and utility services have done even better- more than doubling the growth rates from 4 to 9.4 per cent for the same period.
How does one reconcile these two contradictory positions put out by one body alone? The differences in the base year for the two reports may explain part of the problem. The IIP with 2004-05 as the base year, together with the basket of goods comprising it may not provide a true picture of the manufacturing sector output today. The GDP series, with its 2011-12 base year therefore may be appear to be a better reflector of what really is happening on ground.
How does the RBI Monthly Bulletin tie up with all this? The Bulletin contains results of two surveys conducted by the RBI on a quarterly basis – the ‘Order Books, Inventories and Capacity Utilisation Survey (OBICUS)’ and the ‘Consumer Confidence Survey’. It is movements in these, reflecting to an extent business and consumer sentiments, which may be a better predictor of things to come.
The findings from the OBICUS point to the fact that the growth in average new orders of sample companies was only marginally positive till Q3 2015-16, but it contracted in Q4. There was no significant accumulation to the inventory levels of sample companies during 2015-16. At the same time, the level of capacity utilisation continued to be low in the Indian manufacturing industry in 2015-16. All these reflect a lower business confidence.
The Consumer Confidence Survey captures sentiments on economic conditions- both the current situation compared to the previous year, as also the expectations for the year ahead. The current situation as also the future expectation indices declined during the first half of 2015-16, but improved thereafter. This is not surprising, given the expected salary increases on account of the Seventh Pay Commission bounties, as also the One Rank One Pension Scheme (OROP), the good monsoon predictions, as also the taming of food prices. However, such improved sentiments carry the danger of stoking food, and even more so, service price inflation.
It then appears that the government will need to take further steps to revive stalled projects and improve business sentiments to enhance private investment. More importantly, there should be better coordination between various agencies to ensure that the multiple indicators put out by them match up to provide a single, homogenous picture of the state of the economy.