The HSBC Purchasing Managers’ Index (PMI) on Wednesday validated government optimism that the economy would start looking up from January. The index for manufacturing stood at 57.5 points in January, up from 54.2 in December, the highest since May 2011. It grew 6.08 per cent in January sequentially, the highest rise since April 2009.
A PMI reading above 50 denotes expansion and below it contraction.
“Industrial output will pick up in these three months (January to March). Some factors contributing to the increase in output are a correction in coal output and the fact that inflation is coming down,” Prime Minister’s Economic Advisory Council Chairman C Rangarajan told Business Standard. (is the macro turnaround for real?)
Finance ministry officials said despite strong PMI numbers in December as well, the official industrial growth figure may not be high for that month because of a high base effect. However, from January onwards industrial growth would be on a strong wicket. They exuded confidence that despite a high base effect in March again, industrial growth would continue its strong performance.
That, together with an expected rate cut by the central bank, would boost the overall sentiment and economic growth, they said. The PMI data for services, slated to be released on Friday, will be keenly watched, too.
However, what could come in the way of the optimism is the declining savings and investment rates and high inflation in manufactured items.
Chief economic advisor Kaushik Basu had said yesterday, “With the recent moderation in wholesale price-based inflation and an expected decline in the months to come, with attendant implications for monetary policy, investment could pick up momentum.”
But, HSBC chief economist for India and Asean Leif Eskesen does not prescribe a rate cut, as the high demand that pushed up manufacturing also mounted pressure on the inflation front. “All in all, these numbers suggest it's premature for the RBI to cut policy rates,” he says.
On the policy front, the government has started removing bottlenecks in certain sectors. It has announced measures to boost foreign investment in stock markets, given enough hints of starting the process for sugar decontrol and taken measures to remove infrastructure bottlenecks. The next to watch would be how the government tackles the deteriorating fiscal deficit scenario in the Budget, expected to be tabled by mid-March.
