Monthly data releases pertaining to industrial output and inflation (retail and wholesale) are scrutinised carefully to find out what they say about overall growth. The economy for long stuck in a sub-5 per cent growth trajectory has been showing signs of climbing out of the trough. Almost all forecasters, including the Reserve Bank of India, expect the GDP growth during this year to be at least 5.5 per cent in a range of between 5 and 6 per cent.
The monthly data releases are analysed to seek corroboration of growth. The Index of Industrial Production (IIP), which measures the industrial output, is one of the most keenly watched. Industry, as a sector, has been a laggard. Naturally, stirrings of growth however feeble cause a lot of excitement. The monthly IIP data attract plenty of scrutiny for another not so flattering reason. It has been erratic in the recent past and not consistent prompting many to question its value on policy making. There are reasons to think that the government is making all out efforts to improve the quality of the IIP data, but at the moment it is all that one has to study growth trends in an important sector at fixed monthly intervals.
On November 12, the IIP data for September was released. Industrial output grew by 2.5 per cent on a year-on-year basis, Manufacturing, which has a large (almost 80 per cent) weight in the index also posted the same 2.5 per cent growth. Taking into account the September figures, manufacturing growth in the first six months of this fiscal was 2 per cent while the overall index expanded at a slightly higher rate of 2.5 per cent.
Impending recoveryNeither the rate of manufacturing growth nor indeed that of the overall index is particularly noteworthy. However coming as they do after a long period of sustained sluggish growth, these numbers over a six-month period do suggest a marked improvement. For quite sometime, now industrial growth was seen to have bottomed out, but spotting firm signs of recovery has been difficult. The latest IIP gives a firmer indication of impending recovery.
The performance of key sectors, notably capital goods, support the view. However, across all sectors growth has been uneven. Does this indicate a certain degree of fragility? Sectors whose performance is cyclical in nature — basic metals and motor vehicles — grew by over 12 per cent and 9 per cent, respectively, on a year-on-year basis. If their performance is respectable, that of cement has been disappointing. Growth in the sector, which closely tracks the level of economic activity, was sluggish at less than one per cent. The capital goods sector was up by 11 per cent. Electrical machinery grew by 30 per cent but office and computer machinery were sharply down. The biggest laggard has been consumer durables, down by 11 per cent.
Clamour for interest rate cutThese mixed signals can be interpreted positively. After all, the overall mood in the country is one of optimism. On the other side, however, there is a lot more policymakers should do to sustain the growth momentum. The poor performance of consumer durables suggests ameliorative measures on the demand side. It is in this context that the clamour for an interest rate reduction by the Reserve Bank of India in its next bi-monthly policy statement (due in early December) has been at its loudest. The fact that retail inflation has touched its lowest level ever at 5.52 per cent would seem to suggest an imminent rate cut. The news of wholesale price inflation was equally encouraging. It moderated to 1.77 per cent in October from 2.38 per cent in September, the fifth consecutive monthly decline.
However, even though the Finance Minister has joined in the chorus for a rate cut, it is by no means an open and shut case as far as the RBI is concerned. Just a week ago, a senior Deputy Governor of the central bank dispelled those hopes pointing out that there are structural issues to be resolved. This and the fact that food prices, though lower now, can bounce back suggest a status quo by the RBI in December.
Finally, the industrial sector will revive only if investment activities pick up. The government has obviously plenty to do. Reviving the stalled infrastructure projects is not an easy task. It is important to realise that whatever key assumptions that were made to promote infrastructure are now being questioned. The logjam in the coal sector is an outstanding example but there are other nagging issues. Public sector banks have taken a big hit in their exposure to infrastructure projects. Lots of money are needed to repair their balance sheets and to enable them to lend again.
The fall in global petroleum prices is a huge positive, giving an unique opportunity to the government to set right its subsidies burden. While the government’s active role in promoting industry is well recognised, it is the unexpected bonanza in the form of lower oil prices that has underpinned the current optimism so vital for economic growth.
