The Index of Industrial Production (IIP) for August, released on Friday, has provided a shock to most analysts, since it says that the output of the industrial sector as a whole grew by just 1.3 per cent over August 2007 — the lowest monthly growth in a decade. It has dragged down the growth rate for the April-August period to just 4.9 per cent, signalling a clear end to five years of good industrial performance. Manufacturing, comprising about 80 per cent of the index, grew by 1.1 per cent in August and by 5.2 per cent during the April-August period. Electricity did even worse, growing by just 0.8 per cent in August, and taking its growth rate for the April-August period to a miserable 2.3 per cent — almost certainly a result of the failure to add to generation capacity. The stock market reacted with shock, since most investors had taken heart from the good industrial performance in July.
When the outcome differs so sharply from expectations, questions about data adequacy and consistency naturally arise. It is, of course, a logical fallacy to accept a source of data when it confirms prior beliefs and reject it when it goes against them. Still, it is a fact that concerns about the representativeness of the IIP have been voiced for several years, with the much-awaited revision of both the base year and the composition yet to happen. Despite that being the case, it is precisely this index that persuaded analysts that the Indian economy experienced a boom in manufacturing between 2003 and 2007. So it would be self-defeating to not take the index seriously when it says that tide has turned. The question is: even if the 1.3 per cent growth rate is real, could it be an aberration, even from a pattern of deceleration?
A look at the growth rates across industrial segments hints at this possibility. Seven of the 17 industry groups showed negative growth in August. Two of these, cotton textiles and leather goods, are well represented in the country’s export basket. Merchandise exports happened to grow by 35 per cent in August. It will be some time before data on different products become available but, on the face of it, there appears to be some inconsistency. Textile products, which are mostly cotton-based, grew by a meagre 2.9 per cent, reinforcing perceptions of inconsistency. Other significant sectors showing negative growth were chemicals (which account for 14 per cent of the overall index), and rubber, plastic, coal and petroleum products, as also metal parts and products. The last mentioned declined by over 12 per cent, although the sector that feeds into it (basic metals and alloys) grew by 8 per cent. Two other sectors (transportation equipment, and machinery and equipment), both important indicators of the business cycle, grew by 11.2 per cent and 4.5 per cent, respectively, taking their April-August growth rates to 13 per cent and 8.4 per cent. Both are significant components of the capital goods segment, which however grew by a mere 2.3 per cent — compared to 30.8 per cent last August. Some other components of this category obviously did very badly.
Over the past four years, even as the overall index showed steady acceleration, there were a few monthly episodes of sharp deviations, typically negative. Given the apparent inconsistencies in the August numbers, it might be prudent to wait for other evidence, such as second quarter corporate results, which have started being announced, before deciding that the clearly evident “recession” in growth has given way to virtually no growth.