Prime Minister’s Economic Advisory Council chairman C Rangarajan had advised caution while interpreting the data by HSBC purchasing managers’ index that showed contraction in services in India in September — as no other parameters have corroborated these findings. Leif Eskesen, HSBC chief economist for India & Asean, demystifies the data in an interview with Indivjal Dhasmana. Edited interview:
Why is it that your survey finds contraction in services activity in India in September, but none of analysts speaks of such a thing in the second quarter of this fiscal, instead talk of only decline in growth numbers?
This reflects the fact that the PMI (purchasing managers’ index) readings tell you something about the change in activity between two months. For example, suppose you have a reading of 52. It means that activity has expanded between two months. If in one month it is 52 and another month 51, that just means that the monthly growth rate has slowed. You can, therefore, have a deceleration in the monthly growth rate that is still consistent with solid annual growth rates.
In a comment on PMI numbers on services, you said financial intermediation was witnessing further slowdown. But RBI data does not point towards that. What could be the reason for divergent facts?
There is no divergence there. The latest HSBC PMI readings for September for the services show that the moderation in sequential growth was led by financial intermediation companies, but these are interest-sensitive sectors. Both the RBI and we were expecting to see a slowdown in the growth momentum in response to the lagged effect of monetary tightening. It’s also important that we are talking about a moderation in the sequential momentum and to point out that credit growth still remains in the neighbourhood of 20 per cent on an annual basis.
How true could be your assessment on financial intermediation when most of it is occupied by public sector banks? (HSBC PMI is based on a survey of around 500 private sector companies.)
Whether you are a public-owned or a private bank, your funding costs still depend on the policy rate. Moreover, they are both affected to more or less to the same extent by changes in credit demand.
What more should be done to boost manufacturing in India, besides National Manufacturing Policy as is talked about in the government circles? (PMI data showed that the September manufacturing growth hit the bottom of two and a half years, close to contraction point).
Looking ahead, the manufacturing sector in India needs to be supported through broad and deep structural reforms. Of course, continued investments in basic infrastructures are a pre-condition for any take-off in the sector over the medium term.
In addition, ongoing efforts to bridge skill-gaps in the economy are important to ensure a higher supply of skilled labour and it is critical to also lift structural growth constraints such as rigid product and labour markets, which have in particular held back growth in the manufacturing sector. In response to these reforms, India’s manufacturing sector could increasingly supplement the service sector as an engine of growth, effectively leading to a re-balancing of the economy on the supply side.