In October, as in September, investment demand contributed more to economic growth than consumption did
Ravi Krishnan
The most important takeaway from the September quarter GDP numbers was that investment demand contributed more to economic growth than consumption did. That trend continued in October, as the latest estimates of the Index of Industrial Production (IIP) show.
In October, the consumer non-durables sub-index was up 7.9 percent on year, which on the face of it, is decent growth. However, the pace of growth was lower than the 8.2 percent seen last year. Looking at Apr-October averages, consumer non-durable output growth slipped to 4.5 percent, compared to 7.6 percent a year ago. The slowdown in consumption is yet another piece of evidence that points to rural distress.
On the other hand, the capital goods and infrastructure output sub-indices have gained 16.8 percent and 8.7 percent, respectively. For April-October too, the growth rates are 8.7 percent each, a clear acceleration from the pace of 2017-18. This gives credence to the theory that a recovery in investment demand is well on. The gains in infrastructure also point to a strong government push in this sector.
Will these trends continue? It's hard to say. Events of the past week – the shock resignation of the RBI governor and the BJP's loss in three Hindi heartland states in the assembly polls – suggests three things at this point in time.
One, the government will look to alleviate rural distress on a war footing after the polls. While the time for increasing MSP is gone, there are reports that it will at least consider a loan waiver. That should give a boost to consumption.
Two, there is little leeway for the government to continue spending this way because the fiscal deficit is already 105 percent of the budget estimates. It would be loathe to invite a downgrade from ratings agencies with fiscal profligacy.
And in the absence of that, three, the government will look to boost credit growth in a bid to shore up consumption. Never mind that non-food bank credit growth of around 15 percent, RBI's board in its meeting on Friday (December 14) is again going to consider a liquidity window for NBFCs, according to reports.
