The drift in industrial activity since December 2010 is further confirmed by the recently released data on the index of industrial production (IIP) for May. Industrial output increased by 5.6 per cent the lowest rate of growth in nine months — it was 8.5 per cent a year ago. Growth rates have declined in the two key sectors of manufacturing and mining, the former from 8.9 per cent to 5.6 per cent and the latter from 7.9 per cent to just 1.40 per cent. Electricity has been the one bright spot — it recorded a growth of 10.3 per cent in May 2011, compared to 6.3 per cent last year. Within manufacturing, the lower figures for both capital and intermediate goods suggest declining investment and industrial activity. Higher interest rates might have moderated consumer demand, but it is also likely that many private sector players have deferred investment decisions in the face of large and growing uncertainties in policymaking. The sharp drop in the mining index is explained by the lacklustre performance of the coal and gas sectors. Many new mining projects have been delayed for environmental reasons. The absence of clear land acquisition and utilisation policies has also not helped either. On the other side, there are many instances of companies not exploiting the coal beds allotted to them for captive purposes.

It is unrealistic to expect policy imbroglios such as those over environmental clearances of sensitive projects or over land acquisitions and utilisation to be resolved soon. Nor is it likely that the Reserve Bank of India will heed the call of industry and desist from hiking interest rates further. The inflation figures for June, unveiled few days after the release of the May IIP data, showed a rise in the rate from 9.06 per cent in May to 9.44 per cent. Even before that it seemed certain that the RBI would persist with its strong anti-inflation stance to contain expectations. Over the recent past, the central bank has come out strongly in favour of price stability, even if it meant a slowdown in growth. Perhaps it is time to moderate expectations from the manufacturing sector. It cannot be expected to grow at the same scorching pace it has, of around 15 per cent annually, over the recent past. Consequently, overall GDP growth forecasts, beginning with those for the current year, will have to be pruned. The government expects agriculture to grow by 4 per cent and services by 10 per cent in the current year. Even with the slower industrial growth, GDP growth should well be between 7.5 per cent and 8 per cent, and that will still be commendable.

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