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Here’s a conundrum -- manufacturing growth in the current quarter is projected at a mere 0.9 percent year-on-year by the Central Statistics Office, after shrinking by 1.1 percent in the December 2022 quarter, but the Purchasing Managers Index (PMI) for manufacturing has been showing robust growth for several months now. In fact, the Manufacturing PMI for February has come in at 55.3 today, well above the 50 mark, signifying strong expansion from the previous month.
To be sure, the PMI measures month-on-month expansion, so it’s different from the GDP growth numbers, which usually measure year-on-year changes. Even so, consider what Pollyanna de Lima of S&P Global said about the manufacturing PMI data for February: “Companies were confident in the resiliency of demand and continued to add to their inventories by purchasing additional inputs.” That is markedly different from what the estimates for Gross Value Added for manufacturing are telling us. And what demand are the firms surveyed talking about when the GDP numbers project private consumption growth at a piffling 1.5 percent for the current quarter? That is why this piece asked whether the economic recovery is running out of steam.
The divergence between the picture painted by the PMI data and the GDP numbers is, simply put, due to the K-shaped recovery. NielsenIQ’s retail sales data show that volume growth declined in all four quarters in 2022, with rural demand being badly affected, as this analysis by my colleague Ravi Ananthanarayanan points out. All the stories about ‘revenge spending’, the boom in travel and tourism, the increased sale of luxury homes, point to the K-shaped recovery. The top firms in the PMI surveys may be doing well, but the situation is very different for the masses.
That is also seen from the RBI’s consumer confidence survey. The latest one in February showed that only 32 percent of those surveyed said they would increase spending on discretionary items in the next one year. No wonder, the Index of Industrial Production shows that production of consumer durables in December 2022 was lower by 10.5 percent from a year ago.
The question is: What will the Reserve Bank of India (RBI) do? Recall that, at the previous meeting, the Monetary Policy Committee (MPC) had raised its GDP growth projections for Q1 and Q2 of FY24 to 7.8 percent and 6.2 percent, respectively, against the earlier forecasts of 7.1 percent and 5.9 percent. Gaurav Kapur, chief economist at IndusInd Bank, wrote in this piece that external pressures are going to test the economy’s resilience in the coming fiscal year. Will the MPC projections change after the latest GDP numbers, considering that private consumption is so weak?
But if demand is weak, how is core inflation remaining elevated? Simply put, firms have been successful in passing on input price increases to their customers. A look at the Q3 corporate results show that manufacturing firms have maintained their operating and net profit margins and have even improved them compared to the preceding quarter. MPC member Jayanth Varma had said at the MPC meet in December 2020, “Anecdotal evidence suggests that in several sectors which are characterised by an oligopolistic core and a competitive periphery, the oligopolistic core has weathered the pandemic well and it is the competitive periphery that has been debilitated. Rising profits and profit margins, improving capacity utilisation and lack of new capacity additions create ripe conditions for the oligopolistic core to start exercising pricing power.” And the MPC statement in February this year said, “The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation.”
This then is the dilemma the RBI and the MPC face: whether to continue to tighten monetary policy in an effort to bring core inflation down, while at the same time higher interest rates slow down growth. It doesn’t help that one big reason for weak consumption is inflation in food prices, over which the central bank has no control.
Recall that two members of the MPC voted against a rate hike at the last meeting. On the one hand, there is the view of RBI Deputy Governor Michael Patra that “low and stable inflation is the credible nominal anchor for a reinvigoration of growth”. Set against that is what Jayanth Varma said at the last MPC meet: “In the second half of 2022-23, monetary policy has, in my view, become complacent about growth, and I fervently hope that we do not pay the price for this in terms of unacceptably low growth in 2023-24.”
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Technical Picks: TI India, Nifty, Berger Paints, Castor seed and Hindalco Industries (These are published every trading day before markets open and can be read on the app).
Manas ChakravartyMoneycontrol Pro