IIP troughed out, but greater consumer demand crucial to catapulting recovery into growth phase
ZyFin Research's Business Cycle Indicator (BCI) indicates that the Index of Industrial Production (IIP) will remain on the growth path in September 2014, official data for which would be only available in November 2014. The BCI is a lead indicator to IIP final estimates, and the August reading (corresponding to IIP trend in September) is at 8.1%, up from 7.7% in the previous month. The BCI's advance estimate of the IIP trend has a success rate of more than 70%.The steady incline in the BCI since April 2014 signals the revival in Indian business environment. This is, however, yet to develop into a growth phase, owing to weak consumer confidence. In fact, the ZyFin Consumer Outlook Index, a monthly measure of Indian consumer confidence, dipped slightly in August, reflecting a decline in the euphoria associated with the new Government. Without a pick-up in confidence, business activity would remain slow. Some of the indicators that translated into a higher BCI in August include continued rise in foreign tourist arrivals, improving external sector including foreign assets as well as the foreign exchange and, on the domestic front, rising production levels of basic elements such as copper and aluminum, and rising railway freight revenues. However, weak availability of electricity, a rising petrol import bill and dwindling domestic air traffic all have a negative bias on the overall score.
Giving his views on the August number, Debopam Chaudhuri, Chief Economist, ZyFin Research, said, With IIP undergoing a healing process, the biggest worry right now is that weak consumer confidence will impede the recovery. Monthly data suggests consumer confidence around employment has declined the most. This makes it more pertinent for the new government to initiate serious expectations management of end consumers. This needs to be done while the benefits of economic reforms are still to be felt on the streets.
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