The Index of Industrial Production (IIP) for October did what several analysts had feared, by dropping below the level achieved in October 2007. While the overall index declined by a marginal 0.4 per cent, its most important component, manufacturing, fell by a more significant 1.2 per cent. The other two components, mining and electricity, grew by 2.8 and 4.4 per cent, respectively. While this is the first time since the mid-1990s that the index has shown a decline, the signs of trouble had been building since as long ago as July 2007, when the index began manifesting a volatile but distinctly downward pattern. Several early indicators had already suggested that the October numbers would be weak. The high base of October 2007, when the index grew by 12.2 per cent, was an aberration from previous and succeeding months, and therefore an important factor. Merchandise exports had fallen by over 12 per cent in this October. Automobile sales too had been very weak, particularly in the commercial vehicles segment, which saw sales declining by over 36 per cent from October 2007. And, the woes of the real estate sector are increasingly visible, with liquidity constraints bringing construction activity in a large number of projects to a virtual standstill.
These factors are fully reflected in the latest IIP numbers. Industry segments like textiles and textile products and leather, all of which have a relatively high proportion of exports, all declined significantly. Leather and leather products declined by a huge 18.1 per cent from October 2007, while cotton textiles and textile products, which include garments, declined by 9.6 per cent and 4.4 per cent, respectively. The news can be expected to remain bad, although (unlike October) November 2007 does not provide the high base against which comparisons will next be made. That is in part because the November export numbers show an overall decline of 10 per cent, which would suggest that the negative numbers in these segments will continue into the industrial production figures for the month, when they are released.
Meanwhile, transport equipment declined by 6.1 per cent; here again, the downturn in commercial vehicles, which is a manifestation of a broader capacity expansion cycle, is likely to keep the growth rate low for some months to come. The weakness in construction shows up in a decline of 3.3 per cent in non-metallic mineral products, which largely comprises cement. Basic metals and metal products barely managed to keep themselves in positive territory. Machinery and equipment, which reflects ongoing investment activity, grew at just above zero, indicating that overall investment is sluggish. However, the slowdown is not confined to these sectors; 10 out of the 17 industry segments showed a decline from October 2007. Among the use-based categories, both consumer durables and non-durables showed declines of 3 and 2 per cent, respectively, from October 2007, suggesting that the economic environment is taking its toll on consumer confidence.
That the US, Japan and many of the large European economies are in recession means that the demand for exports will remain low for a while and very little that the Indian government can do will change that. The burden of recovery therefore lies entirely on a revival in domestic demand. The ongoing monetary and fiscal stimuli, both at a broad level and more narrowly targeted towards key sectors like construction, are obviously going to help, but will take time to kick in. That the inflation threat has all but disappeared provides assurance that the domestic stimulus will continue for as long as necessary and a recovery will eventually ensue. But, the next few months are likely to be grim, and the government needs to do more than it has done so far to address the downturn.