Economicpicture blurred asdatashowsdivergence

LACK OF CLARITY While purchasing managers’ index shows expansionary trend, the data on new investment announcements continue to disappoint

February 2018. One basis point is one hundredth of a percentage point. Base effect disruptions caused due to demonetisation could have played a role in the higher growth figures for IIP in January and February.

While IIP figures for May and June 2018 would shed more light on this confusion, they will not be available for some time. What do these divergent trends tell us about the level of economic activity in the Indian economy?

Madan Sabnavis, chief economist at CARE Ratings said that the PMI data is intrinsically flawed when it comes to interpreting real production. This, Sabnavis said, is because it only covers the private sector and is based on binary questionnaire where you say yes or no. While PMI is a useful quick indicator, it never gels with the IIP numbers, Sabnavis added.

Explaining the divergent trend between PMI and capex numbers, Sabnavis said “Investment is different from production as we are dealing only with fresh capital being installed which has not increased. This is as capacity utilisation rates are low and demand for investment is low. Therefore this is true picture on capital formation.”

Aditi Nayar, principal economist at rating agency ICRA said that an improvement in both rural and urban consumption driven by a modest pickup in economic growth is likely to bolster capacity utilisation in various sectors, which could lead to a broad based capacity addition by the private sector in the second Jan-18 Jun 2014 Mar-18 Apr-18 May-18 New investment projects announced-in each quarter (YoY % change) 159.0

139.3

-22.5 Nikkei India manufacturing PMI Nikkei India services PMI Feb-18

115.2 31.1

Sep Dec Mar Jun 2014 2014 2015 2015 Sep Dec 2015 2015

-14.8

-36.4 16.9 21.0 Sep Dec Mar Jun Sep Dec Mar Jun 2016 2016 2017 2017 2017 2017 2018 2018

Mar Jun

2016 2016 -20.2

-26.2 -30.1

-35.6 half of the ongoing fiscal year.

What actually happens in the next few months will depend on pulls and pressure from various forces. Rise in Minimum Support Prices (MSPs) and a normal monsoon is likely to boost consumption demand. On the other hand, -50.5 -63.7 Jun-18

-25.5

-21.1

a rise in inflation, which could lead to another rate hike by the RBI could further discourage investment in the economy. We will have more clarity on this when GDP figures for the June quarter will be released around August.