The Index of Industrial Production (IIP) numbers for June 2008, released yesterday, are a notch better than the bleak numbers for the previous month, but they reinforce the general belief that the economy is in the midst of a slowdown. This is not unexpected; the concern is about the intensity and likely duration of the slowdown. While there are few pointers to be gained from the monthly releases, the fact that the June numbers have been noticeably better than the May ones does suggest that the bottom of the trough may have been tested. The numbers may remain at or close to these levels over the coming months, but they are unlikely to get worse. In fact, given that the slowdown began to manifest itself in the second quarter of 2007-08, a low-base effect should kick in from July, and therefore keep the monthly numbers from dipping in the remaining months of the year.
Coming to the specifics, the general index grew by 5.4 per cent over June 2007, taking the industrial growth rate for the first quarter of 2008-09 to 5.2 per cent. Compared to the 10.3 per cent registered during the corresponding quarter of last year, this is a sharp dip. But if it is indeed the bottom, then the economy is not too badly off. One has only to recollect the prolonged period when index growth rates were 3 per cent or less during the slump of 1998-2003. Manufacturing, the largest component of the index, has more or less mirrored the general index. Electricity, however, should cause some concern. It has slowed from a growth rate of over 8 per cent during the first quarter of 2007-08 to just 2 per cent this year. Reduced demand may be a reason, but in a perennially power-starved economy, this could also be an indication that the supply situation is worsening. If this means that producers have to rely increasingly on captive generation, the price pressure from petroleum products will hit them even harder.
The pattern across individual industry segments indicates a wide variation in performance. Somewhat surprisingly, transport equipment, which faces a challenging environment with high interest rates and fuel prices, grew at a respectable rate of 11.9 per cent during the quarter. Machinery and equipment, an important barometer of investment activity, was sluggish relative to its robust performance of last year but still managed to grow by 9.2 per cent in June, taking it to 6.8 per cent for the quarter. By contrast, consumer durables, also sensitive to interest rates, grew by a rather sluggish 3.8 per cent during the quarter after having declined by 0.7 per cent during the first quarter of 2007. The textiles and garments segments has also shown persistent sluggishness, despite the sharp depreciation in the rupee during the quarter, which should have helped to boost exports, but came up against weak global demand.
Overall, this is not a picture that suggests free fall. Yes, the industrial sector is showing the impact of the business cycle and the anti-inflationary stance of monetary policy, but the strong underlying trend seems to be limiting the deceleration. Investment activity still appears to be healthy, a good sign that the trend remains intact. However, electricity, that old bugbear, threatens to spoil the party.