Steady, but slow

IIP data argue for easier monetary policy

The July numbers for the Index of Industrial Production, published last Friday, reinforce the broad pattern that has emerged over the past few months. Industrial output is, indeed, gaining momentum, but slowly and incrementally. The overall year-on-year growth during July was 4.2 per cent. After the upward revision for June, which took the number up to 4.4 per cent for that month, the April-July growth rate works out to 3.5 per cent. This is slightly below the 3.6 per cent recorded in the same period last year, but this does not undermine the moderate recovery story. The reason for this is that electricity generation, which grew by 11.4 per cent during April-July last year, slumped to 2.6 per cent this year. This in and of itself is a matter for concern, but that is another story. The signs of recovery are much more evident in the manufacturing sector, which accounts for about 75 per cent of the index basket. This sector grew by 4.7 per cent in July, taking its April-July growth to four per cent, significantly above the 2.8 per cent clocked in the previous year.

Looking at the growth patterns across industries and use-based groups, as is typical of moderate recoveries, there are wide variations. Across industries, garments did well, with 21.4 per cent growth, building on a relatively good record over the past few months. Electrical machinery also did well, with 20.9 per cent growth in July, but its four-month record is a more modest 6.4 per cent, suggesting some transitory factors at work. But, the star performer was furniture, which grew by 69.3 per cent, taking its four-month growth rate to 38.4 per cent. On the negative side, office equipment and accounting machinery declined by 14.8 per cent, more or less in line with its performance over the past few months. Food products also declined by 12.1 per cent. Among bellwether sectors, motor vehicles grew by 7.9 per cent and basic metals went up by 6.8 per cent, both numbers being consistent with the moderate recovery story. However, cement declined by two per cent, suggesting some sluggishness in construction activity. Overall, across use-based groups, capital goods and consumer durables did reasonably well, growing by 10.6 and 11.4 per cent, respectively. For the latter, this comes on the back of a 20 per cent decline last July, so there is a large base effect at work, but the four-month growth rate of 5.8 per cent suggests some clawing back after a relatively bad phase. Somewhat surprising is the decline of 4.6 per cent in consumer non-durables, in a situation in which food and energy price pressures softened, presumably leaving consumers with more discretionary spending power.

These numbers should not have any impact on the current policy radar screen. In no way do they suggest that the economy is breaking out of a relatively range-bound recovery phase. For monetary policy, while the inflation numbers expected to be out today will be a factor, the basic scenario of low inflation with sluggish growth suggests looser policy is possible, while simultaneously working on transmission through the banking system. For the government, pushing hard on infrastructure remains the imperative.