The August Industrial output data was a surprise for the economy. It jumped to 6.4% from 4.1% the previous month. Needless to mention then this was way higher than popular estimates. Improvement in areas like mining, manufacturing, consumer durables and electricity has been credited for this surprise. Of course many have cited this rise in consumer demand to be linked to festivities and is expected to fade once the festival season draws to a close.
Traditionally the IIP numbers have been known to be volatile and are never considered as a reliable measure of the economy’s state. But the good news here is more than the uptick seen in core sector growth, the visible signs of upward movement in capital goods segment is a big positive. This upmove in capital goods clearly signals rising investment in this area and larger conviction of India Inc. Economists too seem upbeat and expect the spike in industrial activity to continue facing north in the immediate future. According to them this broad-based growth seen in electricity, mining and manufacturing is considered to be more due to smoothening of supply-side roadblocks.
With borrowing costs seeing a downward move given the RBI’s recent rate cut and a gentle nudge to banks to pass on the benefits to end customers, will this signal a beginning for the infra push that the economy needs quite badly at the moment. With the inflation showing signs of stability, the Govt should not let go this improvement in factory output. Though the recent consumer price index is at a 9-month high, it is more due to waning base effect and inadequate rains. There is urgent need for the Govt to now push public spending at lightning speed and take advantage of the current trend. Not only is it important from the perspective of keeping the present momentum upbeat but also can be an important trigger for banks to sort out asset quality and capitalisation concerns in the financial sector for sustainable manufacturing activity going forward.