From an analytical point of view, the hustle and bustle on factory floors can sometimes serve as useful pointers on the direction of the broader economy.
Here’s a piece of data, which, seen in isolation, should stand out as a sizzling indicator that the economy is cantering along rapidly. The index of industrial production (IIP) grew 11.7 percent in October. In other words, this implies that the millions of factories, from the large corporations that are flag bears of India’s emerging global manufacturing might, to the micro enterprises peppered across the country’s landscape, produced 11.7 per cent more output in October this year compared to a contraction of 4.1 per cent during the the same month last year.
Capital goods output, a popular proxy to measure levels of investment activity, grew by 22.6 per cent, a sharp swing from the previous year’s contraction of 2.9 per cent in October. Prima facie this should be a sign of good augury. If more machinery and equipment are being rolled out, it would, other things remaining the same, mean that factories are looking to add new capacity lines to meet growing demand for their goods.
It may, therefore, be tantalising to consider that goods are flying off faster from shop shelves than before. Household consumption and buying patterns are driven as much by their current income levels as also by what they believe their future income growth is likely to be.
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Confidence in future income growth is a key determinant in buying decisions of many products, particularly cars and consumer durables, as most of these are bought on loans. A household should feel confident enough about their ability to finance a loan over a five to seven year period for a product (such as a car or a refrigerator) that they would buy now.
The industrial output has some key data points. The headline growth in the consumer durables output has been recorded at 15.9 per cent in October 2023, from an 18.1 percent contraction the same month of 2022. The favourable base effect—a statistical phenomenon—may have partly magnified the growth numbers.
A few caveats, therefore, may be in order: The growth in the index of industrial production—the closest approximation for measuring economic activity in the country’s business landscape—needs to be seen over a period of time, rather than a single month’s data.
November will be the crucial month to fit a more discerning trend. Diwali was in November this year, which is when household buying activity and consumer goods’ demand would have peaked. If the trend of IIP growth holds robustly through November-December, then it would be reasonable to assume that the broader economy, powered by consumer demand, is accelerating onto a faster track.
Gaurav Choudhury is consulting editor, Network 18. Views are personal, and do not represent the stand of this publication.
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