Macro vs micro trends

The numbers for industrial production during February, released last week, show that manufacturing output grew by 12.3 per cent over February 2006, taking the growth rate for the year to date to over 12 per cent and pretty much cementing the advance estimate for GDP growth during 2006-07 at over 9 per cent. Well, so much for the year gone by. Do the numbers tell us something about the year just beginning? This question has to be answered against the backdrop of forecasts for the year that have been announced by various agencies over the past few weeks. The most recent of these is from the International Monetary Fund (IMF), which currently sees the Indian economy growing at 8.4 per cent during calendar 2007 before slowing down a bit to 7.8 per cent during calendar 2008. From a financial year perspective, this clearly implies that the growth rate for 2007-08 will be less than 8.4 per cent, because the fourth quarter of 2006-07 will be replaced by a less buoyant fourth quarter of 2007-08 in the calculations. This is broadly in line with forecasts from domestic agencies, which are tending to converge in the 8-8.5 per cent range for 2007-08.

The main reason for the relatively slow growth during the current year is that interest rate increases are beginning to bite. The most recent data on automobile sales show a significant decline in sales during March; this will show up in next month's industrial production numbers. In the February release, the most significant indication of this impact is in the consumer durables segment, which grew at a strikingly low rate of 1.6 per cent during February, compared with over 20 per cent in the corresponding month of the previous year. This took the cumulative growth during April-February 2006-07 to below 10 per cent. Taking the evidence from automobiles and consumer durables together, a slowdown in the coming months is clearly on the cards. As if these demand-side forces were not enough, there were also disappointing numbers from the electricity sector. Generation grew by only 3.3 per cent during February.

Going by the severe shortages that have emerged across the country in recent weeks, it seems that this is indicative of a trend rather than being a monthly aberration. Industrial production over the next few months, then, is likely to face a double whammy from declining demand and constraints on power supply.

But, the February numbers are not all bleak. The most significant positive trend is in capital goods, which grew at over 18 per cent during February, thus clocking 17.8 per cent for the April-February period. This is higher than the previous year's number, suggesting that the investment cycle is still very much on the upswing, which will offset some of the interest rate impact on consumer spending. Also, consumers appear to have switched from durables to non-durables, which grew at close to 10 per cent during the month. Overall, the February numbers are consistent with the widespread consensus about a moderate slowdown during 2007-08. But, more importantly from an investment perspective, the microeconomic foundations of the growth process appear to be changing. The impact on some sectors will be far more severe than the macroeconomic numbers might suggest. Conversely, others will do rather well even as the economy as a whole slows down a bit.