The months from August onwards are considered to be critical for the Indian economy on two grounds.
The months from August onwards are considered to be critical for the Indian economy on two grounds. First, the first phase of monsoon is indicative of the prospects of the monsoon rainfall and the resulting kharif crop. This becomes crucial as it has a bearing on the rural spending tendencies for the year, as it is assumed, logically though, that there is an uptick at this point of time. The second is that there is a tendency for industrial output to pick up, as this is the start of the festival season, which is again important as households tend to spend more during these months. Hence, while the first few months are rather modest in terms of economic expectations from industry, momentum is gained during the next five months or so through December.
In this context, it is pertinent to view patterns, if any, from the trends in industrial growth during the year across these time periods. Typically, the year can be divided into four parts. The first is April-July, when there could be some residual spending coming in from April-May followed by the onset of the monsoon, which is also the slack season for economic growth. Companies too are busy finalising their accounts, and production levels are relatively low-key, waiting for demand conditions to turn. With the monsoon setting in, construction projects go slow as activity is constrained by the rainfall.
The second phase is August-September, which is the start of the festival season (Janmashtami, Raksha Bandhan, Ganesh Chaturthi, etc), when consumer spending picks up as households get active in this space. More importantly, firms build up stocks which can be sold in the following three months. This is followed by the harvest season, which starts end-September and ends in December and also coincides with the major festivals (Dussehra, Diwali, Christmas) in the country—this should be boom time for sales, though production would adjust to the inventories built-up simultaneously. This is also the marriage season in traditional Hindu households, which adds to the spending fizz.
The last phase is from January to March, where demand is pulled more by companies that need to meet targets and hence the year-end phenomenon catches on. Also, the onset of the rabi harvest provides some stimulus to the spending spree, which is aided by discounts, especially in automobiles as well as consumer goods. The accompanying table provides the shares of these four periods in industrial growth for the last four years, which could be characterised by the first year being normal (2013-14), followed by two drought years, and then a good monsoon year in 2016-17. The table shows that there is no clear pattern emerging for these four periods, probably due to the distortions caused by two droughts in 2014-16 and demonetisation in 2016-17.
The spread across these periods has varied quite sharply over the years, with the August-September period being fairly low-key in the last three years. The October-December months have not quite touched even the one-third mark, and higher contributions have tended to come from both the first and last periods alternately. Output in Q4FY17 was affected by demonetisation as the system was readjusting to the new payments system that was invoked with new currency notes and emphasis on digital payments, which affected demand. Even more interesting is the profile of contribution of these periods to the production of consumer durable goods, as it is largely believed that this segment gets a big push during the festival cum harvest season.
Here, the emerging picture is that the festival season comprising five months has crossed 50% in two of the four years. In the other two years, which were the drought phases, the first and last periods had a larger contribution. The conclusions that may be drawn are that while there is prima facie reason to believe that the festival and harvest seasons are critical from the point of view of industrial growth, this is not reflected in terms of actual numbers in the last four years. In fact, even the infra industries have displayed a varied pattern where conventional wisdom has been turned around with the August-September months witnessing a fairly high contribution of nearly 30% in 2013-14 and 2016-17.
Therefore, the production cycles of companies do not follow what is normally assumed when it comes to rhyming with seasons. There are tendencies to adjust stocks while preparing for high-demand times when there are expectations of higher demand in the coming months. Hence, production of infra industries could increase during the monsoon time to meet the demand that may emanate in post-monsoon months. Or it could be linked with the pattern of government spending which would be agnostic to weather conditions and dependent more on fiscal spacing. It is hence necessary to distinguish between production and sales. While the latter is definitely season-dependent from the consumer point of view, production would have to be spaced out through the year, unless the industry is related to an agro product like cotton or sugarcane when seasons matter as harvests take place once a year.
Otherwise, production follows a normal curve, and while specific companies would increase production before the onset of the spending season, it is not necessary that the same will continue in the peak season. In fact, during the festival season, production could slow down due to the ‘holidays’ being accorded to the staff. More important would be the inventories cycles that would be constantly adjusted to demand conditions. Hence, while it is tempting to wait for the harvest cum festival season to expect a rebound in industrial production, this may not be necessary and will depend a lot on the industry concerned and the stocks that have been built up.
For FY18, given that destocking has taken place prior to the implementation of GST in July, companies could be working towards ramping up production, preparing for the festival season that could see an uptick in the months of July to September. Interestingly, monetary policy used to be based on a slack season till September followed by a busy season policy from October onwards. In the last four years, the share of the second half in incremental credit was 49%, 31%, 23% and 41%, respectively. Quite clearly, this was acknowledged well before when RBI disbanded this concept.
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