Core sector output climbed to a five-month high of 5% in June. That's up from 3.2% in May and 1.1 percentage points higher than a year ago. Also, GDP growth is expected to be around 6.7% in the first quarter. But one may wonder whether everything is good on the economic front?
On the construction and public-works story, cement and electricity output each rose 9.8%, and iron ore, just added to the index, jumped a staggering 43.9%. But one must remember that the activities in these sectors don’t represent broad-based industrial revival. During the same period, crude oil output fell 4.2% in June, and natural gas production dropped 7.4%. The energy sector is under huge pressure. Activities in the energy sector actually tell you whether real economic activities such as manufacturing, transport, and consumption are picking up or not.
As per ICRA's own numbers, GDP growth for the April-June quarter is projected to ease to 6.7%, down from 7.4% in the first quarter, with industrial growth slowing sharply to 4% and the agriculture sector cooling too due to a bad Monsoon and low Kharif sowing. However, the services sector is holding things together in the economy. So the ‘5-month high’ isn't a natural momentum building. It is basically a rotation; well-designed government intervention to keep momentum going; public capex is propping up cement, electricity and steel. But at the same time, energy-hungry parts of the economy stay vulnerable to external shocks like the US-Iran war and Hormuz conflict.
The good numbers are basically the result of government spending doing the heavy lifting again. But private investment is not stepping up. Households are treading with care and not opening their wallets faster. Crowding-in only works if private capex eventually follows the public push. So far it hasn't happened. Obviously, there is a significant increase in thermal power generation capacity driven by demand and the energy sector, along with the economy, is transforming. Still, the weak energy outputs are not encouraging. It simply means that firms aren't confident enough yet to ramp up production for real demand.
Also, one must keep in mind that a weak May comparator makes June look stronger than it is. So things in the economy are not off-track but are vulnerable. There is a need for improvement in private capex and energy numbers before assuming that the situation is improving.
The good numbers are basically the result of government spending doing the heavy lifting again. But private investment is not stepping up. Households are treading with care and not opening their wallets faster. Crowding-in only works if private capex eventually follows the public push. So far it hasn't happened. Obviously, there is a significant increase in thermal power generation capacity driven by demand and the energy sector, along with the economy, is transforming. Still, the weak energy outputs are not encouraging. It simply means that firms aren't confident enough yet to ramp up production for real demand.
Also, one must keep in mind that a weak May comparator makes June look stronger than it is. So things in the economy are not off-track but are vulnerable. There is a need for improvement in private capex and energy numbers before assuming that the situation is improving.
Rajeev Upadhyay
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