The recovery is a lot more robust than in even the 2003-07 high-growth phase. Non-durables are the exception but this could be due to food items like sugar, says Poonam Munjal.
The industrial sector has rebounded sharply after recording a weak performance in 2008-09. From 2.1 per cent in May 2009, the IIP hit double-digit growth in only two months, posting an annual growth of 10.6 per cent in August 2009. In the last three months (December ’09 to February ’10), industrial growth averaged around 16 per cent. In 2009-10, when farm output contracted, industry emerged as the key engine of growth.
The lost ground in industrial output during the peak crisis period has already been recovered in the current rally. The improved performance of industry was initially a result of government stimulus which is now being increasingly complemented by a pick-up in private demand. Improving global conditions and the weak base of last year also supported industrial recovery. Our analysis shows that industrial recovery is getting broad-based with reducing volatility.
Within industry, the fastest-growing sectors are consumer durables and capital goods; surprisingly, the consumer non-durables segment has been a laggard. While focusing on these segments, we have analysed the patterns of the current industrial resurgence in terms of its broad-basing and volatility. The volatility has been captured by Coefficient of Variation (CV) — a measure of dispersion of data-points in a data series around its mean value. We examine the characteristics of industrial recovery for upturns and downturns in the last decade to put the current recovery in context.
Within use-based categories, capital goods and consumer durables have contributed the most to industrial growth. Capital goods, which had grown at an average rate of 15.9 per cent during the high-growth period of 2003-04 to 2007-08, saw a deceleration in growth to 8.1 per cent during 2008-09. However, the segment subsequently picked up during 2009-10, growing robustly at an average rate of 37.5 per cent during November 2009-February 2010. The CV shows relatively greater volatility during the recovery period of 2009-10 as compared to the crisis period of 2008-09. However, the lower CV of 0.5 during November 2009-February 2010 is closer to the CV of 0.41 during the high-growth period from 2003-04 to 2007-08. This shows that the current growth in capital goods is gradually moving on the path of high growth which is less volatile.
Of the total 55 industries within the capital goods category, 43 posted positive average growth from November 2009 to February 2010 (see table). This is lower than the number of industries (50) which posted positive average growth during the high-growth period. During the downturn in 2008-09, this number had slipped to 33 as demand for capital goods had slowed considerably due to short-term uncertainties. However, as the economy started displaying clear signs of recovery, industries regained confidence to invest in capital goods, giving way to higher capital goods production. Interestingly, the number of industries that recorded robust average growth of over 20 per cent during November 2009 to February 2010 stands at 25, much closer to 26 industries during 2003-04 to 2007-08. This number had gone down to 14 during 2008-09.(See table)
Consumer durable goods, another growth driver, had expanded by an average 10 per cent during the high-growth period. The growth fell to 4.5 per cent during 2008-09 due to slack demand and shortfall in availability of credit. However, the hike in salaries of government employees and arrears after the implementation of the Sixth Pay Commission recommendations boosted demand for consumer goods. Besides, lower interest rates under expansionary monetary policy led to cheaper credit during 2009-10. The sector grew by an average 25.8 per cent during 2009-10 (till February 10), recording an average growth of 36.4 per cent during November 2009 to February 2010. The CV works out to be 0.2 for the period November 2009 to February 2010, which is even lower than that during 2003-04 to 2007-08, at 0.8. In fact, the CV for the entire 2009-10 (till February 2010), at 0.38, is also lower than that during the high-growth period. This shows that consumer durables began displaying consistent growth from the beginning of 2009-10.
At the disaggregated level, of the total 27 industries within consumer durables, 19 posted positive average growth during 2009-10 (till February 2010). The same had stood at 22 during the high-growth period of 2003-04 to 2007-08 before falling to 11 during 2008-09. However, most of the 22 industries which recorded positive growth during 2003-04 to 2007-08 clocked slower growth compared to those in the current recovery period of 2009-10. This is evident from the fact that the number of industries registering average growth of over 20 per cent stands at 14 for 2009-10 (till February 2010), while the same was at only seven during 2003-04 to 2007-08. Clearly, growth in consumer durables during the current recovery period is much more robust and consistent as compared with that in the previous high-growth period.
On the other hand, consumer non-durable goods continue to lag behind in performance. Their poor growth appears inconsistent with the industrial pick-up during 2009-10. This sector grew by an average of 1.6 per cent during 2009-10 (till February 2010), while it had clocked an impressive growth of 9.4 per cent during 2003-04 to 2007-08. The high CV of 3.7 during 2009-10 (till February 2010) reflects the sharp volatility in its growth pattern. The reason could be food items like sugar which performed poorly during 2009-10.
Sustained growth in capital goods, which is a key indicator of increased investment activity, augurs well for overall economic growth. Similarly, growth in production of consumer durables, which has been more robust and sustained as compared to the previous recovery period, mirrors the improvement in public sentiment. Among other use-based categories, basic goods and intermediates have also recorded higher and more consistent growth during 2009-10 (till February 2010). Overall, industry appears to be moving on to the path of continued recovery.
While year-on-year growth continues to be high, the month-on-month momentum in the de-seasonalised IIP data is moderating. So, the 16 per cent growth achieved in last three months will not be sustained, high single-digit growth industry (9 per cent) is the most probable scenario over the next year.
The author is an economist with Crisil. Views expressed are personal
