A couple of years ago, when industrial production was showing some signs of revival, one commodity seemed to be taking the entire burden of acceleration. This happened to be the garments sector, which showed close to three-digit growth for several months. This performance was completely at odds with the growth registered by the textiles sector, which, logic would suggest, should grow at comparable rates. The reason that this backdrop may be important is that the February numbers for the Index of Industrial Production (IIP), which were published on Friday, provided a significant positive surprise. The general index grew by five per cent over February 2014. This was appreciably higher than analysts' estimates, which were around the 2.5 per cent level. Its manufacturing component, accounting for about 75 per cent of the index, grew by 5.2 per cent. Of course, some of this apparent surge is attributable to the base effect. The general index declined by two per cent in February 2014, while the manufacturing component declined by almost four per cent. But analysts always take the base effects into account, so there is still a large unexplained component to the acceleration.
The performance of individual industries provides a clue. And this points to the old suspect, garments. This industrial segment grew by 62 per cent, by far the highest rate recorded across groups. Significantly, this number took the April-February growth rate for the segment to a paltry 4.9 per cent, highlighting the fact that it had been performing quite poorly for much of the year. As in the past, this number is inconsistent with the performance of the textiles sector, which grew by a mere 5.1 per cent in February. Finally, it is difficult to reconcile this number with the recent negative trends in exports, of which garments account for a significant share. If this outlier is to be discounted, few other segments support the view that there is anything more than a modest recovery under way. Basic metals grew by eight per cent, but both fabricated metal products and cement declined by 8.2 per cent and 1.2 per cent, respectively. Among the capital goods segments, electrical machinery grew by 35 per cent, while both computing equipment and communication equipment declined by over 40 per cent each. Motor vehicles increased by about eight per cent, but other transport equipment declined by a similar number. In short, if garments had grown by their recently recorded rate, the index would have grown by what the analysts had predicted.
Policy responses need to discount outliers and focus on the core trends. These suggest persistent sluggishness. Supporting this impression from the IIP data are trends in credit growth, which is recording all-time low numbers, and corporate profitability, which showed unimpressive numbers in the last quarter and is not expected to improve significantly in the January-March numbers either. The Reserve Bank of India's conservative response to the drastic decline in inflation is unquestionably a contributory factor, but cannot be the only explanation. Even if the quality and credibility of the IIP data were to be questioned, the more objective and transparent indicators cited above support a somewhat more negative story than the government would like everyone to believe. One reason for this is that concrete actions to stimulate investment have simply not been as visible as they need to be.
