Economists fear India’s recovery may be plateauing

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India’s industrial growth remained tepid at 3.2% in the peak festive month of October, weighed down by the base effect and weak production of consumer durables and capital goods, sparking concern that the economic recovery may be plateauing.

Economists called for more measures from the government to support the revival, pointing to below-expectation growth in October and signs of moderation in some of the high-frequency indicators in November. Industrial production had grown 3.3% in September and 4.5% in October last year.

The infrastructure sector provided the silver lining with 5.3% growth on a high base of 10.9% rise in output in the same month last year. Overall, the index of industrial production (IIP) was 7.8% higher than the pre-pandemic level of October 2019. Sequentially, the index is up 4.3% in October over September.

“The IIP growth has been very fragile and even festive demand was not able to uplift IIP growth in October 2021,” said India Ratings chief economist DK Pant.

Consumer durables production contracted 6.1% while consumer non-durables output rose a modest 0.5%. Production of capital goods, an indicator of investment activity, contracted 1.1%. Manufacturing output was up 2%, mining 11.4%, and electricity 3.1%.

Weak Start to Third Quarter

“Our expectation was 5.1%, based on the expectation of pent-up demand pushing up growth,” said CARE Ratings chief economist Madan Sabnavis, pointing to the setback in consumer durables.

The contraction in the first five months of last year had boosted growth in the early months of the current fiscal. The moderation in this base effect has dampened growth in recent months. The chip shortages that impacted many sectors, including automobiles and some consumer goods, contributed to this slowing.

Ten out of 23 manufacturing sub-sectors recorded negative growth in October. Motor vehicles posted a 12.6% decline in production in October. Industrial output in the April-October period is up 20% compared with a 17.3% contraction in the same period last year.

The modest October industrial growth number marks a weak start to the third quarter. The Indian economy had grown 8.4% in the second quarter. The Reserve Bank of India (RBI) had earlier this week retained its FY22 growth target of 9.5%.

Outlook

Economists say the moderate growth in October is concerning, even after discounting for the base effect and the supply disruptions, and November does not look good either.

“Even as the ongoing supply challenges in the auto sector persisted, the YoY performance of several other high-frequency indicators deteriorated in November 2021, including electricity demand, GST e-way bills, port cargo traffic etc., suggesting that economic activity lost steam after the festive season ended, with a satiation of pent-up demand,” said Aditi Nayar, chief economist, ICRA.

Pant of India Ratings said, “Weak consumption and investment trend imply that the heavy lifting to take the economy out of sluggish growth has to be done by the government.” The RBI had left rates unchanged earlier this week.

November may still see some base-effect bounce because of 1.6% contraction in the year ago.

Barclays is optimistic, attributing the slowdown largely to supply issues, and expects improvement. “Higher government spending, especially capital expenditure, could spur further industrial demand, keeping the recovery intact through H2 fiscal year (September-March 2022),” said Rahul Bajoria of Barclays.

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