Up again

Among all the indices that point to the overall economic tempo, the index of industrial production is the most important, for several reasons. The service sector is more than twice as large as industry, but many of its components are difficult to track in any reliable fashion. And the agricultural tempo changes infrequently (since there are only two harvests in a year) and usually within a narrow range. Trade figures too are important, but it is the industrial tempo that points to credit needs, tax revenues and other key drivers of macro-economic performance. So it should be re-assuring that industrial growth is reported to be back in double-digits in August, after a dip to barely 7 per cent in July. Those worrying about the prospect of an economic slowdown would take heart.

However, it is important to read the numbers carefully "" because much of the increased tempo is explained by 17 per cent growth in the mining sub-sector. This is most unusual, probably without precedent, and even perhaps questionable. Mining is not an area prone to sharp swings in output, since the production of coal, iron ore, bauxite and the like is usually quite stable if one discounts the seasonal swings on account of the changing weather. Nor can crude oil production have surged suddenly from the ONGC's declining oil fields; and it is hard to believe that production from new fields will have contributed to such a sharp surge in one month. In the unlikely event that such is indeed the case, the new level of output is likely to be sustained and that would certainly under-write double-digit industrial growth for the year as a whole. In which case, forget all fears of a slowdown.

There are other problems with the data. Consumer goods production, especially of the durables sub-set, has been showing very low, virtually nil, growth in recent months. This is not what the manufacturers of white and brown goods have been reporting, and the explanation appears to be that the weightings within this sub-set are completely out of line with market reality, with excessive importance given to products like radios that are no longer market-leading segments. With the index's weightings dating back to 1993-94, it is time a review was done so that it is more reflective of current reality and thereby a better guide to what is going on in the economy.

What this analysis suggests is that growth is less dependent on capital goods demand than the index might suggest. Indeed, with banks having begun to lower interest rates in an effort to lend more money as their deposits surge, it is entirely likely that even the credit-driven segments of demand (mostly for automobiles and housing) will see a bit of a recovery. If that happens, on the back of what is expected to be a good harvest, the fears of an economic slowdown can be banished as far as the current year is concerned. Don't be surprised if the proliferating growth forecasts start to inch back up again.

The one problem area that remains is exports. Non-oil exports are down to the 11-12 per cent range, the lowest in perhaps the last decade. Cutbacks, even shutdowns, have been reported in important sectors like textiles and leather, and with the rupee showing signs of strengthening further, more trouble is to be expected. This is therefore the critical issue that the managers of the macro-economic situation have to deal with, and there are no easy answers.