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.