Business Standard

Early warnings

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Business Standard New Delhi
While the monthly index of industrial production, which is one of the earliest available indicators of the health of the economy, is released with a six-week lag, a small subset of it, referred to as the "infrastructure" index, is made available about three weeks after the end of the month.
 
Though there isn't a high degree of correlation between the smaller and the larger indices, dramatic changes in the first indicator, particularly on the negative side, must be looked at with some concern.
 
This is the case in the latest release, which indicates that the index of six infrastructure sectors""crude petroleum, petroleum refinery products, coal, electricity, cement and finished steel""registered only 3.6 per cent growth between April 2004 and April 2005, compared with 10.5 per cent between April 2003 and April 2004.
 
With an increasing number of voices suggesting that industrial activity is on the verge of, if not already into, a slowdown, this news will provide some substantiation to the pessimistic view on this front.
 
The spread of the decline in growth rates over the six sectors for which April data have been reported does suggests the beginning of a trend. The most significant changes are those in the petroleum refinery products and the electricity sectors, both of which feed directly into virtually all other sectors of the economy to a greater or lesser degree.
 
Declines in production, therefore, should, prima facie, be correlated with falling levels of activity across the economy. In fact, the production of petroleum refinery products actually declined by almost 8 per cent from last April.
 
Electricity generation grew at a paltry 2.9 per cent, compared with over 10 per cent last April, when the industrial sector as a whole was relatively buoyant. One obvious interpretation of the decline in refinery output is that consumption has been adversely affected by rising prices (despite the government's efforts to buffer consumers against them on some products).
 
Inventories have been building up as a result, and refiners have no choice but to reduce output. This is a classic inventory-driven pattern of slowdown. There may not be as simple an explanation available for the performance of the electricity sector, because there is typically inadequate supply, but at the very least, there should be a direct correlation between economic activity and electricity consumption. Low growth rates in generation do not augur well.
 
Other sectors like cement and steel, while seeing declines in their growth rates, have not seen the bottom fall out. However, one April number that is not included in this index, but which would add considerable support to the perception of slowdown, is a decline of 15 per cent over last April in the sales of commercial vehicles.
 
This sector has been a very important driver of industrial expansion over the last couple of years and such a dramatic decline cannot but hurt at the macroeconomic level. The bottom line is that while it is yet too early to call a slowdown, there are an increasing number of signs pointing to it and people better start thinking of ways to either offset it or deal with it.

 
 

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First Published: May 30 2005 | 12:00 AM IST

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