IIP points to beginnings of a narrow-based recovery.
The numbers for the Index of Industrial Production (IIP) for May, released last Friday, are another pointer to a gradual recovery that has been in evidence in the industrial sector. Last month, the April numbers indicated year-on-year growth of 1.2 per cent. These were subsequently revised upwards to show growth of 1.4 per cent. The May numbers outdid April quite substantially, indicating 2.7 per cent year-on-year growth for the overall index. Manufacturing, which accounts for about 80 per cent of the index basket, grew by 2.5 per cent: still modest, no doubt, but a welcome change from the persistently negative numbers that this segment had been showing over the previous several months. The April and May numbers reinforce the growing perception that the bottom of the business cycle is now behind us. As this pattern consolidates, it should provide greater assurance to the government that rising tax collections will not allow the fiscal situation to deteriorate beyond the already stretched Budget estimates.
Going beyond the aggregate to the segmental picture, though, it is clear that the incipient recovery is rather narrowly based. Even though as many as nine of the 17 industry segments showed positive growth during the month, the numbers themselves are generally quite small. The main driver of growth is the use-based category of Consumer Durables which, following up on its 16.4 per cent growth during April, finished May with a 12.4 per cent increase. The sharp increase in the production of durables is clearly a response to the spike in demand following the payout of arrears and increased salaries to government employees. The fact that this process will continue for some time to come as state governments and public enterprises follow the central government bodes well for the segment. It also demonstrates the value of a consumption-driven stimulus, which the recent Budget has also tried to provide. One rather surprising feature of the May numbers is the 9 per cent growth in Textile Products, which has for some time been reflecting the sharp decline in exports. This growth took place in a situation in which the other major exporting sectors continued to decline rather sharply, and may be attributable to higher domestic demand arising from fiscal measures. Hopefully, it will also translate into jobs being saved.
But the reality is that a full recovery cannot be driven by a few industry segments. From that perspective, neither the industrial sector nor the economy as a whole should be assumed to be out of the wood just yet. Other consumer goods segments like food products also need to show some momentum before a consumption-based recovery can be declared. The slump in exports will continue until the US, Europe and Japan turn around, which will not happen before next year. And domestic investment, while not entirely in the doldrums, remains sluggish, with a recovery dependent on an improvement in overall growth. In short, the IIP numbers provide more green shoots, but they still are only shoots.