Lopsided momentum

The index of industrial production (IIP) for May 2007, released yesterday, shows that the overall index, comprising the manufacturing, mining and electricity sectors, grew by 11.1 per cent over May 2006. Within the basket, manufacturing, which has been by far the best-performing sector over the last few years, maintained its lead, growing by 11.9 per cent. The electricity sector, which has been showing some signs of improvement as far as this index is concerned, grew by 9.4 per cent, substantially higher than its growth rate during the same month last year and providing some food for thought for those who see an imminent crisis in the availability of power. Overall, the growth in the index is comparable to the numbers it has been notching up over the last few months, although somewhat slower than its over 13 per cent growth performance during April 2007.

That spike was, of course, due to the surge in the manufacturing sector to over 15 per cent growth, which in turn was mainly on account of two sectors - wood products and food products, which grew at 92 per cent and 55 per cent, respectively. Without the contribution of these two, the growth number for April looked much more modest and so it is in May as well. Although growth in manufacturing has come down by over three percentage points, the sectors in question have overshot their already remarkable April numbers. Wood products grew by as much as 133 per cent during May, while food products grew by almost 25 per cent. These two, therefore, have disproportionately contributed to the sector's overall growth during May as well.

Looking beyond these at some of the other, much larger, sectors, the picture is rather mixed. Continuing to do well is the machinery and equipment sector, which clocked about 22 per cent, indicating that the investment boom in new equipment continues unabated. Matching this was the performance of basic metals, which grew by over 21 per cent during May. Both sectors accelerated marginally during May relative to April. In contrast, the big deceleration in transport equipment continued during May, when production actually declined by 0.1 per cent, taking the cumulative April-May 2007 growth to a meagre 2.3 per cent. The numbers released by the automobile industry association for June reinforce this trend for the sector as a whole, although there is some buoyancy in the sales of passenger cars as a result of some new model launches. Many other important sectors""cotton textiles and chemicals, for instance""showed growth rates in the modest single digits.

Taking the April and May numbers into consideration, it appears that the buoyancy in manufacturing that has been visible over the last couple of years is becoming skewed towards a few sectors, while others show distinct signs of moderation. From the perspective of the quarterly monetary policy announcement, due in a couple of weeks, the increasing skew sends a rather complicated signal. If the Reserve Bank of India is to discount the wood and food sectors, it could interpret this month's numbers as a sign that the expected deceleration is finally kicking in. Unfortunately, the buoyant machinery and metals numbers weaken that argument. Be that as it may, the softening of inflation, together with these industrial production numbers, tilts the scales in favour of maintaining the status quo on monetary policy.