Photographer: Dhiraj Singh/Bloomberg

India Manufacturing Surge to Fizzle Out as Oil Bounty Fades

  • Manufacturing growth spurt at odds with other indicators
  • Revisions increase doubts about credibility of GDP data

India’s growth data is once again raising questions, and that signals trouble ahead for the world’s fastest-growing major economy.

This time the surprise was a manufacturing surge that contrasted with other indicators, including official industrial production data and a private purchasing managers’ index. The discrepancy in part suggests that companies saw margins rise from lower input costs rather than higher volumes -- an “oil bounty" that won’t be around next year, said HSBC Holdings Plc’s Pranjul Bhandari.

“Put another way, India is likely to lose its main driver of growth," Bhandari wrote in a Feb. 9 report.

With China slowing down, India’s surging growth rates have made it a bright spot in an otherwise gloomy global economy. Yet the headline numbers have puzzled economists ever since the government’s statistics department changed its method for calculating gross domestic product a year ago, and Monday’s data release only added to the confusion.

Attracting factory jobs is key to Prime Minister Narendra Modi’s growth plans. He’s pushing to boost the share of manufacturing in the economy to 25 percent by 2022 from about 18 percent now to put 100 million people to work. Next week he plans to hold an investment fair in Mumbai to woo companies under a program called “Make in India."

While investment growth overall remains subdued, Modi has seen some success in changing the impression of India as a difficult place to do business. From the time he took office in May 2014 through September, foreign direct investment rose to around $42 billion in India -- a 27 percent increase from the prior 16 months at a time of slowing global demand.

Sony Corp. last year shipped its first television sets made in India and Lenovo Group Ltd. and Foxconn Technology Group started making smartphones in India.

‘Deepen Doubts’

Still, the 12.6 percent jump in manufacturing in the last three months of 2015 from a year ago belied other indicators. Industrial production in November fell by the most since 2011, and PMI data in December indicated a slowdown for the first time since 2013.

Other numbers in Monday’s data release also raised eyebrows. The government revised April-June GDP growth to 7.6 percent from 7 percent, and that for July-September to 7.7 percent from 7.4 percent.

These changes are "more likely to deepen doubts about the quality of the official data than improve sentiment towards India’s economy," Shilan Shah, Singapore-based India economist at Capital Economics, wrote soon after the data was published.

‘More Complicated’

To meet the government’s full-year GDP growth estimate of 7.6 percent, household consumption would have to increase an "unrealistic" 12 percent in January-March, according to Anubhuti Sahay, head of South Asia economic research at Standard Chartered. That’s almost double the average over the three previous quarters, she said.

Investment is also unlikely to rebound in the final three months of the fiscal year as the government slows spending to meet its budget deficit target, she added.

"We hesitate to draw conclusions about growth drivers," Sahay said, adding that she’ll watch for trends when actual data is released in May.

India’s top statistician said that India’s growth rate doesn’t mean Asia’s third-largest economy is booming. While production volumes increased, sales declined and input costs fell even more steeply, TCA Anant said in an interview on Tuesday. 

“It’s not a clear-cut story," he said, adding that the data must be filtered through the current economic situation. "The underlying reality has become a lot more complicated."

The GDP revisions were partly due to a surge in tax revenues, he said, adding that the data could see one more revision "though of less magnitude."

Wobbly Recovery

Either way, the numbers point to a wobbly economic recovery ahead. A Bloomberg survey of 23 economists taken before the latest data release saw GDP growth at 7.4 percent in the year through March -- below the government’s estimate -- before accelerating to 7.8 percent in the following 12 months. HSBC and Standard Chartered retained their full-year predictions even after the government raised its forecast.

Despite the slowdown in manufacturing, a stronger monsoon will boost consumption and lower borrowing costs will spur investment, according to HSBC’s Bhandari. She predicted GDP growth at 7.4 percent in the current fiscal year and next, while Standard Chartered sees GDP expanding 7.4 percent this year and 7.6 percent next year.

“Don’t panic in a hurry," she wrote. “Piecing together the jigsaw suggests that the drivers of growth could change in a manner that keeps growth rates unaltered."

(A previous version of this story was corrected to show HSBC predicts 7.4 percent GDP growth in FY16 as well as FY17)

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