The data on industrial production released recently give room for optimism that the worst is over on the industrial front, though a cloud of uncertainty remains over the economy as a whole. The industrial production index (IIP) recorded an increase of 7.8 per cent in June, the highest in 16 months, and it has come on top of a 5.44 per cent rise in June 2008. It is no statistical illusion resulting from the “base effect,” and the impressive June performance has been reasonably consistent. In May, the IIP rose by 2.22 per cent on a year-on-year basis. The index touched its lowest level in December 2008, when it turned negative by 0.25 per cent. It remained very low for the next four months, dropping below one per cent in two of them. No less significant about the June data is that all three major components of the IIP contributed to the growth. The manufacturing index went up by 7.27 per cent, electricity by 7.97 per cent, and, above all, mining recorded 15.43 per cent growth. The IIP growth for the first quarter of the current year worked out to 3.74 per cent. This may not yet portend a robust recovery, but it seems likely that, having hit the rock bottom, industrial production is heading upward.
There are however certain contradictory trends that cloud the macroeconomic picture. An analysis of the “use-based” data of the June IIP figures shows that capital goods production was up 11.75 per cent, suggesting renewed investment activity. However, further corroboration is needed. Given the loss of business confidence during the low point of recession last year, it is likely that businessmen are now pushing the investment plans they had put on hold. The consumer goods segment, which has grown by 15.5 per cent, has no doubt benefited from the stimulus packages and the higher salary incomes in the hands of government servants. At a time when industrial activity looks upbeat, there are definite indications that the GDP growth target for 2009-10 will be scaled down to below 6 per cent. The drought in many parts of the country will result in substantially lower rural incomes, which in turn will have an adverse impact on consumer spending. Higher food prices will further strain household budgets and, at the macro level, aggravate food inflation. One needs to be cautious and desist from reading too much into the seemingly robust signs of industrial recovery as indicated by one month’s IIP figures.
Clarification
The formal expansion of IIP is Index of Industrial Production. Though not an error, “Still a mixed picture” (Editorial, August 19, 2009) gave it as industrial production index.
