The lights continue to shine in the country as the government has
released an even brighter picture of the economy than expected by us. All along
this year we have maintained that despite the falling trend and volatility in
the IIP, growth will be around 8.6% this year and rise to 9% next year. With
the release of the Q2 numbers and revised numbers of the past two years, we now
expect that this trend may materialise sooner. The signals are strong. They are
from many different sources. And they are across a large set of sectors and
However one of the main indicators to keep an eye on is inflation,
all indices show a decline from peaks seen earlier. In the coming months, the
decline is not going to be rapid as pricing pressures continue to persist from
multiple sources. As we know, with a bumper harvest, higher MSPs, higher
minimum wages etc. purchasing power has been given a boost helping to meet
consumption aspirations across the country. Especially in the food segment,
from oil seeds to milk, supply is outstripped by the demand.
The agriculture sector will show a massive rise in output and
growth this year. On the one hand this will dampen inflationary tendencies and
on the other will boost rural demand. As for the industrial sector, the six
core industries that were on the back foot for the past six months finally
showed a growth upsurge in October, with cement and steel production leading
the pack. This points to strong demand coming in from the construction sector,
and despite the shocks to the system from higher loan rates, scams being
unearthed in realty and so on, this is one sector where again demand is far
ahead of supply and real estate and infrastructure projects will push growth up
in the quarter ahead.
At the same time manufacturing activity in other sectors is also
picking up despite higher cost of credit, due to a good festival season and
expectations of surge in rural and small town demand. This is also reflected in
the HSBC-Markit PMI index which reflects the uptick in November in
manufacturing activity, with the fastest expansion in new orders coming in not
only from domestic but also international demand. Over and above that the
backlog of outstanding orders is also finally expected to be met with rising
production. We find that capacity constraints however remain and they will
exert strong upward pressures on pricing in the manufacturing sector.
The service sector indicators in the CSO growth release for Q2 show
a fall over Q1, however there is robust activity still expected in all segments
? railways, air freight and passengers, cargo by shipping, telecom and so on.
As before, the underlying growth in purchasing power will propel growth across
the board. We expect the service sector to take India into the double-digit
trajectory over this decade. Manufacturing and agriculture will be constrained,
unless there is sufficient reform that raises productivity in both sectors. We
see little sign of change on that front, at least in the near future.
So the only fly in the ointment remains that of inflationary
pressures and with the government taking on additional spending, over and above
the budget, this is set to be an even more serious concern in the year ahead.
With so many welfare programmes being put in place, India can well become a
bigger welfare state than the Scandinavian countries, with a large population
that needs to be fed and housed and whose basic health and education
requirements need to be met. These are legitimate responsibilities of the
government, but is the only way of meeting these responsibilities through
higher inflation, or are there better solutions?
We go back to the same uncontrolled animal, inflation. It should
not be taken lightly, at the current levels it is still somewhat under control,
but it can get out of hand very easily. The government would do well to insure
India against food and energy price movements internationally at least. That is
the least it can do and it would be good to see some proactive actions on these