Production sputters

No sign yet of a turnaround in investment cycle

When the numbers for core sector production for May came out a couple of weeks ago, a combined growth rate of over four per cent year-on-year for those six critical industries suggested that there would be similar buoyancy in the overall Index of Industrial Production (IIP) for May. As it turned out, this was not to be. The growth in production during May was estimated to be a mere 2.7 per cent, substantially slower than the 4.1 per cent recorded in April. In fact, deeper analysis of the performance of individual industries in the core sector carried by this newspaper over the past several days raised some questions about the reasons for the accelerated growth. In the steel sector, for example, the analysis suggests that production levels have to be maintained in a continuous process industry even if demand is sluggish. This results in excess inventory and, consequently, margin pressure. That is clearly being seen among steel producers. Cheap imports are another threat. More generally, the message from this apparent disconnect in growth rates is that supply does not create its own demand. The broader industrial sector is still clearly in a state of sluggishness.

Looking at individual industries, wearing apparel has done relatively well, growing by almost 16 per cent year-on-year. Against a backdrop of steadily declining exports, of which garments are a significant component, growth in this sector is likely to be volatile. Basic metals also did relatively well, growing at 9.6 per cent, which the earlier numbers for steel had suggested, but the qualifier about production running in excess of demand applies here. Cement production declined by over two per cent, suggesting that construction activity is not accelerating. Transportation equipment, another reliable indicator of the business cycle, grew by a pallid 4.3 per cent. Two industries that showed significant declines were communication equipment, at -24.3 per cent and office, accounting and computing machinery, at -18.9 per cent. In terms of the use-based classification, capital goods showed growth of 1.8 per cent, substantially below the 4.2 per cent of May 2014 and consumer durables clocked a disappointing -3.9 per cent, again significantly lower than a year ago.

These numbers add up to a rather worrying assessment of the state of the economy. While the government can claim that it is in good health because the GDP growth numbers say so, people who put weight on the IIP will not be reassured by what the May numbers tell them. Importantly, this sluggishness comes against a backdrop of dismal credit growth, which is surely an indication of industrial stagnation and continuing softness in corporate performance, at least as suggested by the early quarterly results. In turn, all these indicators combine to highlight the fact that investment activity is still dormant. One important reason for this is likely to be the very slow progress in re-activating infrastructure. While there appears to be some progress in road building and higher production of coal, which helps the power sector, it is as yet far from persuading the corporate sector to commit resources to expanding their capacities. Without a turnaround in the investment cycle, economic growth, however measured, will not accelerate, notwithstanding all the government's ambitious initiatives.