An argument gaining ground is that Indian industry has overcome stagnation, recorded a turnaround and is set to register high growth. In the search for signs of economic buoyancy in the midst of a recession and in the wake of a bad monsoon, figures recently released by the Central Statistical Organization are being interpreted as indicative of the fact that it is just not the stock market but also the real economy that has “bounced back”. According to figures recently released by the Central Statistical Organisation, in August 2009 the index of industrial production (IIP) rose over the year on a month-on-month basis by 10.4 per cent for industry as a whole and 10.2 per cent for manufacturing. In the case of manufacturing, this increase comes after month-on-month growth rates of 7.8 and 7.4 per cent respectively in June and July 2009. Judging by the historical record, these figures are significantly high even if not near previous peaks. Not surprisingly, they have been read as signs of a sharp recovery in and subsequent acceleration of industrial growth starting June this year. Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission, has gone so far as to declare the August figure a “Diwali gift”.
The difficulty is that “annual” point-to-point growth rates, whether those “points” are a particular day, week or month, are influenced not just by the figure recorded in the most recent period, but in the base period, which in this case is the corresponding month a year back. Growth could be high because of a “base effect”, where a low base value can generate a high rate of growth, just as much as a high base value can generate a low rate of growth. Thus, though the August figure reflects a very high growth rate relative to a year back, the IIP has stagnated over the three month period June – August period with the monthly growth rates relative to the immediately preceding month amounting to just 0.03 in July and the index falling by 0.6 per cent in August. Moreover, if we take a long period consisting of the first five months (April-August) of the financial year, the growth rate relative to the corresponding period of the previous year stood at 5.53 per cent in 2008-09, which, though marginally better than the 5.16 per cent during 2007-08 was much lower than the 10.56 per cent recorded in the first five months of 2006-07. That is over the first 5 months of the current financial year, for which evidence is available as of now, there is no clear sign of recovery.
What then do the August growth figures signify? As the chart makes clear, if we compare the absolute value of the index of manufacturing production for the 12 months starting September 2008 with the same figures for the 12 month starting September 2008, they tally or are near equal in all but three of these 12 months, viz. June July and August. In 2009, the index rises sharply in June and then remains in that neighbourhood over the next two months, whereas in 2008 the index falls sharply between May and August, creating a yawning gap between the graphs depicting trends in these two years. Thus if there were signs of recovery in the annual growth rate computed on a month-on-month basis it was in June since when we have had stagnation in the index. And this level of the index is lower than the peak it recorded in March of both 2008 and 2009. We may still see a recovery in manufacturing and a return to high growth. But August appears a little too early to declare this has happened.
Keywords: C.P. Chandrasekhar, Economy Watch, Indian industry, Central Statistical Organisation, CSO, indices, indicators, Index of Industrial Production,
Actually, a star more massive than the Chandrasekhar Limit will become a neutron star. It must be more massive than the Landau-Oppenheimer-Volkov Limit of 2.3 solar masses to become a black hole.
It may be of help if the author explained the basis of IIP. For some who are not introduced may find difficulty in fallowing the argument.By nature indices are normalized and become independent of the base etc. However separately many corporates reported better performance too.
The sustainability of the IIP index at the high levels clearly shows that India is on the growth track. Of course the exports still lying low may hinder the growth along with low agriculture production. But any revival trend starts with one wheel pulling others. India on a growth track is inevitable.
Figures reported by Industry on monthly basis can not be totally replied upon. Having worked in Industry for three decades in the area of Information Technology, I can confidently state (a) figures reported for half-yearly results i.e., in September and March are invariably inflated as these two months typically "extend" into nearly the second week of next month and every CEO knows and hears the regular complaints from CIO (b) consequently, the figures reported for October and April tend to be lower. Government agencies are aware and even "encourage" this loathsome practice as they also have "targets" to meet on these two magic dates, 30th Sept and 31st March. Even with systems like ERP implemented in India most industries refuse to come out of these dirty habits and so does the government bodies.
It is more realistic to go by yearly averages rather than month-month comparision because of (i) manipulations of figures (ii) seasonal varitions.
One fails to understand why certain members of the Planning Commission are so keen to adopt the growth project of industry as their own? Aren't they supposed to be just displaying the actuals? Why is this speculative adjective being woven while disclosing the performance? Perhaps we should have an public RTI interface whereby the members of Planning Commission spontaneously disclose details of stock holdings of their families and relatives.
The peril in interpreting economic growth data is well brought out in the article. The media, especially the electronic media, which has very wide reach, should desist from reporting such data without having experts explaining its importance.
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