Decoding weak July IIP: Mr Modi, your honeymoon period is over; it's time to act - Firstpost

Sorry, Mr Modi. The people may be enthused by the election of your government, but they are still not opening up their purses to buy stuff that will make India’s factories buzz with activity once again. With retail inflation pinching hard, they are clearly putting off big-ticket purchases. That’s what industrial production and price data put out yesterday show.

The manufacturing sector slipped into the negative zone in July – factory output declined by 1 percent, pulling down overall industrial growth to 0.5 percent. The relatively better performance of the mining and the electricity sectors (which grew 2.1 percent and 11.7 percent, respectively, against (-)3 percent and 5.2 percent in July 2013) could not salvage the situation.

Sure, at 3.3 percent industrial production growth in the first four months of this fiscal is a major improvement over the (-)0.1 percent logged in the same period last year, but as Ficci president Sidharth Birla notes, manufacturing is still not out of the woods.

So much for finance minister Arun Jaitley’s statement, at his press conference just two weeks back, that "the manufacturing curve has turned". Finance secretary Arvind Mayaram had said inflation is moderating. But after dipping every month between April and June, the CPI went up to 7.96 percent in July and has only marginally come down to 7.8 percent in August. Maybe both of them should have bitten their tongues or knocked on wood.

Jaitley’s satisfaction came from the first quarter economic growth figures. But first quarter (Q1) figures relate to the April-June period. Narendra Modi took charge on May 26, which means his government could not influence the economic performance of the first two months of Q1. As for the third month, the slippage in manufacturing started in June (growth slipped from 4.8 percent in May to 1.8 percent in June). But it would be wrong to blame the current government for this – it is clearly an overhang issue.

This government’s test will start from the July figures and unfortunately it has not started well. Performance of the mining and electricity sectors also slipped in July.

At his press conference, Jaitley had said the election results were a mood changer. There is no denying that. The shroud of despondency that had lain over the economy for more than a year had lifted when the BJP got a decisive mandate in the elections. Data bears this out.

The National Council of Applied Economic Research’s (NCAER) quarterly Business Confidence Index (BCI) rose 13 percent in June (Narendra Modi had taken charge by then) against a mere 3.8 percent in April (the country was in the midst of elections).

The Reserve Bank of India’s quarterly Consumer Confidence Survey for June also paints a similar picture – there’s a marked increase in those who expect economic conditions and their household circumstances to improve in the coming one year.

But the fact that the consumer goods sector was in the positive zone only in May shows this sentiment isn’t translating into concrete demand that will drive production of goods. Production by consumer durables factories has declined by over 20 percent in June and July; that of 'motor vehicles, trailers and semi-trailers' came in the positive zone in June (7.3 percent growth) but slipped to 0.3 percent growth in July.

Production of 'radio, TV and communication equipment and apparatus' declined by 58.3 percent in July. This has a negligible weight in the index, but shows that people are putting off discretionary purchases, reducing overall demand.

This certainly has to do with retail inflation refusing to come down significantly. The consumer food price inflation came down steadily between April (9.83 percent) and June (8.05 percent) but flared up again in July (9.36 percent) and went up higher in August (9.42 percent). With food taking up the bulk of the household budget, where is the scope for spending on other things?

What’s worrying about the factory output data is that the decline is pretty broad-based, across sectors. The capital goods sector has seen growth fluctuating a great deal, but this sector tends to be a bit lumpy. But there’s been a decline in basic goods (from 9 percent in June to 7.6 percent in July), while the bellwether intermediate goods sector has been flat for three months running (2.7 percent in May and June and 2.6 percent in July).

So clearly people need to see inflation levels demonstrably declining for them to start spending more, and factories need to see visible signs of sustained demand for them to start producing more and for their proprietors to start planning for more investments.

The laundry list of what needs to be done to contain inflation, stimulate demand and revive investment is too well known to bear repeating. The meter of the Modi government’s economic performance has started ticking from July. The government should keep a hawk’s eye on economic indices from now and make sure that they are put on the path to sustained recovery. There is no time to lose.