The latest macroeconomic numbers, particularly the core sector industries’ growth, have certainly lifted some sentiments. However, it is too early to call it a recovery in a true sense, as it is largely coming from the low base of September-October last year.
On the other hand, the wholesale-price inflation will see the effect on low base effect from December, which would magnify the rate of price rise.
The confidence of policymakers who have on various occasions stated economic growth would show a recovery from October, may be backed by this statistical fact.
Index of Industrial Production (IIP) numbers for September are scheduled to be released tomorrow.
In October 2011, industrial output contracted. Growth in the IIP started declining from September last year. In that month, industrial growth dipped to 2.4 per cent and contracted 4.9 per cent in October.
IIP stood at 165.7 points in August 2012, showing 2.7 per cent growth after successive contraction in June and July, year-on-year. The IIP in August 2011 stood at 161.4 points. It rose slightly to 164.3 in September, which is likely to give a push to numbers for September 2012. In fact, the IIP in October declined to 158.3 points compared to September. As such, from October 2012, a low base effect will come into operation.
The eight core sectors, which saw a rapid 5.1 per cent expansion in September, had seen growth falling to 2.6 per cent in September last year, which further declined to 0.4 per cent in October.
Despite 5.1 per cent growth displayed by the index of eight core industries, which has a 38 per cent weight in IIP, the index has contracted 2.7 per cent on a month-on-month basis. From 143.4 points in August 2012, the index of core industries declined to 139.5 in September.
The trend is clearly substantiated by the widely-tracked HSBC purchasing managers’ index (PMI). The index for manufacturing just inched up to 52.9 points in October against 52.8 points in September. In August as well, the PMI for manufacturing was at the nine-month low of 52.8 points. As PMI is a month-on-month index, last year’s base did not affect it at all.
Take the case of gross domestic product (GDP) growth.
The numbers declined from eight per cent in the first quarter, to 6.9 per cent in the second quarter to 6.1 per cent in the third quarter and 5.3 per cent in the fourth quarter. In the first quarter of this financial year, GDP grew just 5.5 per cent. The low base effect in the remaining quarters are likely to magnify GDP growth numbers this financial year, particularly from the second half.
“The numbers we are seeing now and would see in the next couple of months will be pure statistics and can be related to the low base effect, whereas the actual recovery will come only in the end of this fiscal or starting of the next fiscal,” said Arun Singh, senior economist, Dun and Bradstreet.
Planning Commission deputy chairman Montek Singh Ahluwalia also expressed this point of view when he said the recent reform steps announced by the government would start showing results on growth only by January.
Finance minister P Chidambaram had pegged economic growth at 5.5-6 per cent for this fiscal, amply demonstrating that measures initiated by the government would take time to perk up growth.
India’s economic growth declined to a nine-year low of 6.5 per cent last financial year.
While the government would get some comfort from low base effect on the growth front, the same effect would give it headache on the inflation side, particularly from December onwards.
In December last year, inflation started sloping downwards from a consistent over-nine per cent till November. In December, inflation dropped to 7.74 per cent on the back of food inflation falling to 0.79 per cent and in January, food deflation at 0.68 per cent.
This would put additional pressure on inflation numbers in December, which already has upside risks looming large. “Further upside risks to inflation persist with suppressed inflation becoming open, following the recent electricity tariff and diesel price hikes,” said a YES Bank report.
Inflation rose to 7.81 per cent in in September from 7.55 in August. Inflation figures for October is slated to release on November 14.
The Reserve Bank of India left repo rate unchanged at eight per cent as inflation risks are still high.