The industrial growth numbers for the year have progressively become an academic exercise and while at times there appear to be signs of green shoots sprouting, it is morose for most of the other months. The fact is that there is not much happening in this space and growth rates of 8.2% in October or -0.1% on November are more statistical images rather than a reflection of real industrial activity.
The busy or festival season was one hope for us as this was the time when it was expected that people would spend money which would translate to higher industrial growth. The higher number in October was more on account of Diwali stretching into November which led to higher production in certain segments. One did not expect a replication of the same in case such spending was sustained. The present numbers for November don't really surprise. Automobiles, white goods, electronics are still largely lackluster and there is little investment taking place. Earlier it was only the electrical machinery segment that was down, but now it seems to have covered even the non electrical segment. Clearly, both consumption and investment have taken a back seat this year.
While there is a tendency to point towards interest rates, it explains at best only a part of the story. People are not spending partly due to high retail inflation which is causing more income to be diverted to food items. Investment is not taking place as we still have surplus capacity and no one is going in for expansion as interest rates are high. Infra projects are stuck due to policy issues. The government is not spending due to fiscal concerns. Exports are not rising because the world economy is in a downward phase.
The basic industries including some of our infra industries have done relatively better as cement and steel have seen some positive growth signs. But it is not clear if this momentum can be maintained in the remaining months. By itself this sector cannot propel growth as consumer and capital goods have to be the starting points.
Also the mining-electricity sector nexus is getting a bit pronounced. We have gotten away with reasonable power sector growth at a time when coal production declined in FY12. But this year we have seen that the electricity sector has shown signs of faltering. We clearly need to get our acts for mining (sort out the environment issues), as well as complete the power projects and make our SEBs financially viable or the entire edifice will be in jeopardy in future.
Given the disparate impact of statistical base effects being positive or negative we may just get away with growth of 2-3% this year which will be a consolation of something happening in the absence of any affirmative factor. It is a warning that it could be a status quo next year in case we do not get the house in order. While it is true that things have bottomed out, we cannot take a recovery for granted and it could become a more pronounced U shape future recovery curve with the trough getting elongated. Several things need to happen. Inflation should come down so that rates are lowered. Government should focus more on development expenditure. People should start spending and with administrative hindrances out of the way, investment should recommence.
As one may not expect anything significant to happen in the next few months with probably only a token rate cut at the end of this month, the best that can happen is that industrial growth will not slip into the negative zone, as it has done in November.
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The author is the Chief Economist for CARE Ratings
