Mixed Signals: On Data and Key Industry Sectors

Output data for May from eight major infrastructure sectors showed broad-based industrial activity slowed under the weight of a heat wave that caused homes, offices and factories across the country to use more energy to power fans and cooling systems. Only coal, which powers power plants, and electricity generation posted double-digit output growth, rising 10.2% and 12.8%, respectively, according to provisional data on an index of eight major industrial sectors released by the Ministry of Commerce and Industry on June 28. And output of crude oil, fertilizers and cement fell from a year earlier, while production expansion slowed in the other three sectors of natural gas, refined products and steel. The impact of the heat wave on economic activity in May was particularly evident in northern parts of India, as it forced afternoon shutdowns on construction sites and the daily peak power demand at the Northern Regional Load Dispatch Center consistently hovered around or above 75 gigawatts. Cement and steel demand weakened as construction activity was understandably constrained by temperatures, and both key building materials also saw sequential declines in production. The year-on-year decline in fertilizers for the fifth consecutive month in May is a cause for concern, as it signals continued weakness in the core agriculture sector in the rural hinterland. However, a reasonable increase in the agricultural input index in May compared with the revised April reading provides a glimmer of hope.

However, official data for the core sector, as well as the manufacturing production index to which it contributes more than 40%, suffer from a lag of more than a month. Meanwhile, private sector data, based on the HSBC India Manufacturing Purchasing Managers’ Index (PMI) for June, suggests that factory activity rebounded last month from a three-month low hit by a heatwave in May. The PMI reading for June, at 58.3, was 0.8 percentage points higher than May’s 57.5 and, according to HSBC India, “comfortably above the long-term average.” The survey also said manufacturers increased production and purchasing to meet strong demand, and boosted employment to the fastest pace “seen in more than 19 years of data collection.” However, both job creation and demand were accompanied by a surge in staff spending and the cost of materials and transportation, leading to manufacturing firms raising their selling costs by the most in more than two years. The inflation trend, combined with survey respondents’ overall confidence in future output falling to a three-month low, signals that the economy is still facing headwinds. Policymakers have a chance to use the upcoming EU budget to make policy changes that will help boost momentum in key industrial sectors.