The Index of Industrial Production (IIP) for February 2009, released yesterday, declined by 1.2 per cent from its level of February 2008, in contrast to a 9.5 per cent increase a year ago. The manufacturing sector, which accounts for almost 80 per cent of the index, declined by 1.4 per cent. As a consequence, both the general index and its manufacturing component grew by a modest 2.8 per cent during the period April-February 2008-09. Based on the numbers for January and February 2009, it appears that the fourth quarter GDP growth rate will not be significantly different from the 5.3 per cent recorded in the previous quarter. This means that, for the year as a whole, overall GDP would have grown by, at best, 6.5 per cent, something that an increasing number of government representatives admit. From 9 per cent to 6.5 per cent from one year to the next is a sharp slowdown indeed. It compares with the deceleration during the late 1990s when, after three successive years of 7 per cent growth and more, the economy crawled along at just above 5 per cent per year for the next five years. A repeat of this pattern is not impossible, even if it looks unlikely.
There were fears that the decline in the index would be larger than has turned out to be the case. As with the January numbers, which have been revised upwards this month to show a slight increase in production, this may be seen as yet another sign that the economy is beginning to bottom out. Remarkably, both the January and February numbers were higher than expected because of the relatively high growth rate in the Machinery & Equipment segment, which grew by over 17 per cent in January and continued at more or less that pace in February, increasing by 15.6 per cent. In both months, the pattern has been counter-intuitive. The economy is supposed to be in a demand slump, aggravated by sluggish flows of credit. Rational businesspersons are not supposed to be investing in new capacity, in these circumstances. Yet, the output of machinery has grown so sharply in consecutive months. The numbers are even more remarkable when contrasted with two related sectors, Transport Equipment and Metal Products. The latter declined by 4.4 per cent from February 2008, while the former declined by a huge 31.3 per cent. During the April-February period, while Machinery & Equipment increased by 9.7 per cent, Transportation Equipment grew by a mere 1.4 per cent while Metal Products declined by 2.8 per cent. If anyone can identify the businesses that are investing in these machines and understand their motives, it would be a service to everyone.
However, one contributor to the moderation of the decline is relatively easy to explain. Consumer durables grew by 5.7 per cent over February 2008, faster than during the previous year. This sustains the pattern observed in January and is clearly due to the increased purchasing power of the beneficiaries of the Sixth Pay Commission. This is one fiscal stimulus that seems to be working and will continue to have an impact as it spreads through states, public enterprises and sundry government institutions.