It is possible to argue that deceleration in industry was primarily due to disturbances in the real and financial sector. But it cannot be denied that the negative supply shock in the monetary system, through a credit squeeze, had an important role to play. Once adverse sentiments are generated, they become widespread, encompassing both the real and the monetary sectors.
Even after a year and a half, the general index of industrial production (IIP) has not being showing a distinct upturn. In April, the overall rate of growth reached double digits after seven months. In May, it was almost immediately halved. It is, therefore, easy to discount the sharp rise in industrial growth in April as a mere blip. But there is more to it.
The dip in the rate of growth in May can be explained in terms of seasonality which affects all important segments of the manufacturing sector. Seasonal factors, in fact, are working against the growth trend at this time of the year. The trough values of most of the IIP series occur in May, in addition to September. If the series is deseasonalised, the growth rate in May, over the corresponding period last year, is closer to that achieved in April.
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But the important point is the pattern of growth within the manufacturing sector, and its timing. This can be seen in the accompanying graphs. Instead of analysing monthly variations, a three-year moving average of growth rates has been taken in the use-based classification of this sector.
The recovery starts with basic and intermediate goods (panel I). About five months ago, there was an upturn which has not only been sustained but has also gained in strength. Growth rates touched a low of 5.5 per cent in December 1996, but by May this year they crossed 9 per cent. Here, both the timing and the extent of recovery are important.
In spite of this, the capital goods sector continued to decelerate till February this year with a growth rate of under 2 per cent (panel II). The first signs of a recovery in this sector emerged in March with a growth rate of 7.5 per cent, which has now firmed up to 11 per cent.
As we go closer to the end use segments, consumer durables were still struggling during this period. In February, even as there was a recovery in the basic and capital goods sector, the consumer durable sector showed negative growth. It started recovering only in April this year with a growth rate of over 5 per cent (panel III).The consumer non-durable segment continued to be down in dumps with a negative rate of growth. But analytically, this would be the last segment expected to grow. If it does in the next couple of months, it will complete the chain, and a full-fledged recovery can be seen.
There is scope for optimism that recovery will be transmitted to the consumer goods sector in view of the sharp increase in agricultural production in 1996-97 and the consequent rise in agricultural income.
Consumer demand in 1996-97, which would have been affected by the negative growth in agriculture in the previous year, will now recover with agriculture growing at 5.2 per cent in 1996-97.
As can be seen in panel IV, the disparate patterns and the timing of sub-sectoral recovery add up to a marginally visible recovery in the overall manufacturing sector. The basic point that emerges from the pattern is that the growth impulse is being transmitted from the basic to consumer goods via capital goods. The implications of this are that industrial growth is not as dependent on the consumer goods sector as it was earlier. Recall the boom in industry in 1994-95, which was driven to a large extent by consumer goods. Consumer durables registered unsustainable growth rates of close to 60 per cent in January 1995. The consumer non-durable segment is currently growing at 22 per cent.
There are indications that industrial growth is increasingly being driven by investment demand. Given that the linkages are much higher for industries which are farthest removed from the consumer, this pattern of growth can set in motion mutually reinforcing growth impulses for broad-based and sustainable industrial recovery. For, it is the capital goods sector -- the output of which is physical investment that underlies the good performance of industry in April.
While the data on the pick up in industrial growth is more than three months old, more recent data on other macroeconomic variables, both on the real side as well as the monetary side, also seem to suggest that the worst may finally be getting over. In a broader macroeconomic context, the increase in IIP is not an isolated jump in statistics. The sharp increase comes at a time when credit to the commercial sector is on the rise and interest rates are softening. These are the two main reasons for the slowdown.
On the real side, the import growth rate has picked up. More importantly, it is non-oil imports which are directly related to industrial demand that have shown a rise. This augurs well for industrial growth in the coming months. Even though exports can't be said to have picked up, the decline seems to have been arrested.
Similarly, almost all monetary variables have been showing significant improvement and even a reversal of the earlier trends. The improvement in net credit to the commercial sector is quite noticeable now with an increase of over Rs 3,000 crore in two weeks. While this is in no small measure due to monetary management by the RBI, use-based classification of credit shows that the demand is originating in sectors which are growing -- basic goods and light engineering goods. And finally, the structure of inflation reveals that the overall demand may be picking up. Even though wholesale prices are down to 3.7 the lowest in more than a decade manufacturing prices are firming up. This is a positive signal.
Whatever this phase of slowdown may mean in terms of economic policy management, it is extremely significant in analytical terms. Till now, the major interaction determining the macreconomic outcome was between the fiscal and the monetary policy, which affected the real side. Henceforth, as this phase of slow growth shows, it will be the interaction between the monetary and financial sectors that will determine the contours of growth.