Editorial: An elusive economic recovery

IIP numbers show turnaround still isn't here

The index of industrial production (IIP) numbers for August reinforce the assessment that there are few, if any, signs of recovery in the industrial sector. Year-on-year growth was a mere 0.6 per cent, significantly below consensus expectations. For the April-August period, it was an even more measly 0.1 per cent. The manufacturing sector, which accounts for almost 80 per cent of the IIP, declined slightly in August and was flat for the April-August period. With almost half the year gone by, these patterns do not bode well for economic growth, with projections of anything over five per cent for the year becoming critically dependent on a sharp turnaround in the second half.
 

Looking at specific industries, the imbalance that has been visible over the past several months persists. Garments, for example, showed over 25 per cent year-on-year growth in August, and over 40 per cent for the April-August period. As before, one has to wonder where the raw material for this performance is coming from, since textiles grew by about five per cent in August and by just over three per cent during the April-August period. The other high-performing sectors during August were tobacco products (20 per cent), electrical machinery (26 per cent) and office machinery, including computers (14 per cent).

However, other capital goods-producing industries showed significant declines, taking the aggregate capital goods sector down by almost 15 per cent in August and showing no growth for the April-August period. Consumer durables showed some recovery during August, but experienced an 11 per cent decline during the April-August period. The temptation to give a boost to this sector during the festival season by lowering interest rates was obviously quite strong and the finance minister's signals in this regard have been acted on by public sector banks. This may help revive demand in the short term, but also risks being perceived as interference with monetary policy, which has recently indicated a movement in the opposite direction.

However, looking beyond domestic conditions, a significant positive development was reflected in the trade numbers for September, which may translate into slightly better news in the IIP numbers as well. Exports grew by over 11 per cent year on year, while imports declined by 18 per cent, taking the trade deficit to $6.8 billion, compared to over $17 billion in September 2012. Undoubtedly, this reflects a consolidating recovery and, consequently, expanding demand in the US, but also increased competitiveness of Indian exports as a result of rupee depreciation.

On the import side, the compression is partly cyclical, resulting from slower domestic growth, but presumably, the exchange rate is also encouraging more domestic production. Most importantly, the significant decline in the deficit will contribute to the rupee stabilising over the next few months, which in turn should help revive business confidence. Of course, many other things need to be done to translate stability on this front into higher investment and consumption spending. The fiscal deficit, stubbornly high food inflation and several other well-known hindrances to growth will continue to impede a recovery, notwithstanding the optimism being exuded by the government. More realistically, these numbers suggest that a firm bottom may have been reached.