No respite

Revival of industry nowhere in sight

The numbers for November's index of industrial production (IIP) and December's trade balance were published last week. The former indicate that the industrial sector of the economy is still to find any of the recovery momentum that government spokespersons have been talking about in the second half of this year. The latter suggest that, while the welcome correction in the trade deficit is continuing, the pace of adjustment may be moderating. The IIP numbers are particularly worrying. The general index fell by 2.1 per cent in November 2013, during which it also declined by one per cent from the previous year. This takes the growth rate for the first eight months of 2013-14 to -0.2 per cent, compared with 0.9 per cent in the same period last year. The industrial sector may indeed have bottomed out, but an upward climb is clearly nowhere in sight.

The main culprit this month is the consumer durables segment, which declined by a significant 21.5 per cent during November, taking its growth rate for the April-November period to -12.6 per cent. The October and November numbers for this segment are typically distorted by when Diwali falls in any given year. But the year-to-date numbers clearly suggest that production is under severe stress, reflecting the consumer's willingness to postpone purchases of these items when faced with persistent uncertainty. Capital goods have conformed to their recent pattern by falling by 8.5 per cent during November, taking their decline for the April-November period to 11.3 per cent. While investment as a proportion of GDP appears to be relatively healthy at 33 per cent, as indicated by the quarterly GDP numbers, the broad trend in capital goods production suggests that the aggregate number may reflect concentration in a few sectors, which do not generate widespread demand for machinery and equipment. In short, the investment pattern is unbalanced, which doesn't bode well for a sustained recovery.

On the trade front, export growth in dollar terms is still positive, as it has been for the past few months, but it came down in December from November's reasonably reassuring six per cent. Imports continue to decline sharply and the trade deficit for December was just over $10 billion, somewhat higher than that in the previous month, but sharply below the $17.5 billion of December last year. The good news is that, even if the adjustment is tapering off, the vulnerability posed by the deficit has decreased significantly, translating into lower risks for the rupee. The bad news is that the benefits for competitiveness from a lower rupee, which have presumably contributed to the export turnaround over these few months, are being offset by other constraints - the usual suspects being wage costs and infrastructure bottlenecks.

From the policy perspective, the release of the consumer and wholesale inflation numbers this week will provide direction to the Reserve Bank of India on what to do on or before its scheduled quarterly policy review on January 28. By deviating from expectations in December in not raising the repo rate, it has created the impression that it is now putting more emphasis on addressing growth concerns. November's IIP numbers will now reinforce the expectations of the status quo being maintained, particularly if there is even a moderate softening in the inflation numbers.