Official industrial data from February shows output in the eight core sectors grew at the fastest pace in four months at 5.8%, aided liberally by a low base effect — production had contracted 3.3% a year earlier. However, when compared with January 2022, output in all of these sectors actually declined, with the overall index contracting 5.3%. Electricity generation, a good indicator of business activity and which contributes about 20% to the weight of the index, declined 3.3% from the preceding month. Steel, another index heavyweight that feeds into various sectors of the economy from housing to cars to white goods and small-scale engineering and parts units, dipped 5.2% from January 2022. Making up the largest component of the index, at about 28%, is the refinery products category. For a sector that facilitates other industries by powering mobility, output slid 8% sequentially. The Omicron wave, early in the calendar year, coupled with rising prices likely dampened demand, signalling uneven economic recovery from the onslaught of the COVID-19 pandemic. The road to a full recovery looks long and bumpy, as the latest production levels are still below, or barely above, those seen pre-pandemic. Inflation, which has already breached the Reserve Bank of India’s upper tolerance limit of 6% two months running, is a threat to consumer demand. If demand remains muted, or worse, slips further, the domino effect upstream will only impact the core sectors further. The RBI’s Monetary Policy Committee has its work cut out in a meeting later this week, when the panel will decide on benchmark interest rates that could potentially influence inflation.
At the same time, government spending, which could set the pace for overall growth in a stuttering economy, has not roared forward. Capital expenditure grew a mere 0.8% in February from a year earlier. Even though capex had risen about 20% in the April-February 11-month period, the Centre still had about ₹1.2 lakh crore left to be spent in March, and it appears unlikely that the Government would have met its revised capex target of ₹6 lakh crore for FY22. Though tax revenues have been robust, the Government likely held back on capital expenditure to help offset the lack of divestment proceeds it had budgeted for. Given geopolitical tensions, the stock market has been too volatile for the Government to go ahead with the initial public offer for LIC. The sale of stake in BPCL has also not proceeded apace. Despite these roadblocks, the Government may have little choice but to crank up capital spending early in the new fiscal if it wants to stoke the economy. The multiplier effect would not only benefit industries such as cement and steel, but may also help crowd in private investment, spurring job creation, which has been the economy’s Achilles heel for a while now.