Growth forecasts continue to be revised downwards as the first quarter estimates showed significant moderation from before. Yet, the picture for the year is really not as gloomy as it is being made out to be. Not just us, there are some others who also forecast an up trend towards the fourth quarter, the question is by how much. At the current pace, our estimates still continue to be 8.3-8.5%. The reasons for our optimism are many. For one, the services sector has not been caught in a tail spin and has the strength to provide significant support – e.g. India just registered the highest growth globally in domestic air passenger traffic in July at over 20%, and tourist arrivals have seen higher growth in July, compared to last year. Strong movement in truck rentals and sales, reported by the IFTRT for August, shows that cargo movement has steady demand. Also, agriculture is set to do another good year, though some crops like pulses will still see setbacks.

The problems lie essentially with manufacturing and construction – both these sectors however have volatile data. Cement production that registered 0.88% growth in Q1, according to provisional Ministry estimates, grew at 10.56% in July; the issues with IIP estimates are well known. So while it is clear that these two sectors are going through a downturn, there is still insufficient information about the extent of the downturn. Though the HSBC Markit PMI has shown four months of steady decline in the manufacturing activity index since April- here again, the index points essentially to a moderate slowdown with no signs of contraction in India, as opposed to other countries, pointing again to the strength of domestic demand. This strength is substantiated by credit growth, that is moderately lower for industry in July compared to last year (21.2% vs. 27.7%) and significantly higher for the services sector, commercial real estate, NBFCs and personal loans. Direct tax collections have also shown robust growth.

The latest small business SME survey conducted by Indicus Analytics shows business confidence and prospects higher for Q2 compared to Q1. Though the index is still much lower than last year, the mood is upbeat across all regions for almost all industrial sectors. Interestingly investment expansion plans are significantly higher for chemicals and general purpose machinery. This is largely because past warnings of impending volatility have not fructified and export orders for the non-garments SME sector are showing no signs of slowing down. ACMA also reports that investment plans are very much on track this year, higher than last year.

In effect, while growth this year will be nowhere close to the 9% that the economy could have turned out, the lows of 7% also are highly unlikely. Time and again, we find that the presence of strong demand being under-emphasised. This means that the resultant impact on growth is overlooked and the implication on the pressures on inflation are also not stressed enough. A related problem for the long term is, can a demand surge continue without significant surge in investment? For a few quarters, but beyond that demand cannot be sustained and neither can growth.

So we do have this curious situation where internationally we could see a moderation in primary prices – the Reuters/Jefferies CRB Commodity Index that peaked in April has been quite flat over the past two months, crude has softened too – while domestically we would continue to bear the brunt of price rises. The continuous rise over the past two months in weekly primary article inflation shows the persistence, while our SME survey also shows higher pressures from input costs. With little being done to address supply side constraints, price rises are inevitable. The impact of the softening of international prices could come through, though for crude the fat subsidy bill shows no signs of lessening. For the WPI, therefore, the path seems set to stay high through the next quarter, with inflation moving below 7% by January.

The question remains, where are we heading? The Planning Commission has lowered the 12th Plan growth target from 9.5% to 9%, the government looks happy to settle for 8.5%, which leaves us around where we are now. A small positive sign does appear on the horizon though - a new manufacturing policy is to be out soon, it remains to be seen whether this will change around long term growth prospects.