Doubt on capex trend after latest data
IIP seems to point one way and GDP numbers another
There is still no agreement on whether fixed capital formation is on an uptrend or not yet.
The dismal second quarter GDP numbers had a silver lining in fixed investment growth. Capital goods production in the Index of Industrial Production (IIP) saw contraction, however, in the second quarter as well. At the outset, the numbers seemed to contradict but officials claim a deeper analysis points to convergence.
Gross fixed capital formation (GFCF) grew 4.06 per cent in the second quarter of this financial year against 0.66 per cent in the first quarter. However, capital goods continued to see a fall. In the second quarter, it fell seven per cent. Another issue is whether the GFCF change represented a real uptick in the investment rate or was just a base effect, since it slowed to 5.5 per cent in the second quarter of 2011-12, from 14.66 per cent in the previous one.
India's GDP grew just 5.3 per cent in the second quarter, lower than the 5.5 per cent in the first and equal to that in the last quarter of 2011-12, a three-year low. GFCF in the GDP data is derived from these data sets -- movement in the IIP on capital goods, import data on capital goods, and data on steel and cement, said Pronab Sen, principal advisor, Planning Commission.(ASSET BUILDING)
It is a majority of the IIP data that is used to derive GFCF. He added there was generally a bit of a lag between investment and capital goods production. Capital goods output is captured first and the investment gets recorded in the books only after the production takes place, he explained.
Then, why does capital goods production in the IIP not reflect a recovery as was shown in the fixed investment rate? An official with the ministry of statistics and programme implementation (MoSPI) told Business Standard the GFCF and capital goods data seemed much in sync, considering the contraction in capital goods slowed to seven per cent in the second quarter against 20 per cent in the first one.
In fact, on a quarter-on-quarter basis, capital goods output expanded 10.66 per cent in the IIP data. GFCF saw an expansion of 1.26 per cent on a quarter-on-quarter basis, while it had contracted two per cent in the same period last year.
“The growth in investment came mainly from the construction sector, be it steel or cement,” said Madan Sabnavis, chief economist, CARE Ratings.
Cement production grew 13.8 per cent in September. However, it had shown a dismal growth of 3.2 per cent and 0.4 per cent in July and August. Steel output, however, did not grow exponentially. It grew two per cent in September, 1.8 per cent in August and 0.8 per cent in July.
Construction activity grew by 6.7 per cent in the second quarter against 6.3 in the corresponding period last year. However, it was lower than the 10.9 per cent in the first quarter, though this came largely from the low base of 3.5 per cent in the year-ago period.