Unusual spike

The Index of Industrial Production (IIP) numbers for April 2007 were released by the Central Statistical Organisation yesterday. These are, of course, the first indicators of activity for the current fiscal year. The last financial year ended with a bang, a level of performance that very few people, if any, expect will persist. So, while it may have been premature to expect a dramatic change in April 2007, it would also have been excessively optimistic to expect acceleration. But, as it turned out, that is precisely what happened. The overall index grew by 13.6 per cent from April 2006, significantly higher than the 11.5 per cent growth rate it showed for the full year 2006-07. The manufacturing component of the index, accounting for almost 80 per cent of the index basket, grew by 15.1 per cent over April 2006, compared with 12.5 per cent over the whole of the previous year. Electricity generation increased by 8.7 per cent over last April, compared with 7.2 per cent during 2006-07. Only mining grew by a lower rate in April than it did during last year.

But, is this evidence of strengthening momentum in the industrial sector, contrary to the expectations of forecasters and, presumably, the desire of the Reserve Bank of India (RBI), which has been striving to rein things in a bit? Not conclusively, if one looks at the industries that have been the main contributors to the spike. Wood and wood products, a relatively small component of the manufacturing basket (less than 4 per cent), grew by a whopping 92.2 per cent over April 2006. The industry had already done quite well last year, growing at almost 30 per cent, but the April numbers are stratospheric and certainly warrant deeper examination. The other big reason for the spike was food products, which account for slightly below 12 per cent of the manufacturing basket. This sector grew at an equally surprising rate of 55 per cent over April 2006, many multiples of its rather moderate 8.7 per cent growth during 2006-07. Again, the causes for this massive acceleration are worth exploring. Could data errors be responsible for these unusual numbers?

Putting these two aside for the moment, other industries do provide a mixed picture. On the one hand, machinery and equipment, reflecting the apparent persistence of the investment boom, grew by 19.2 per cent over April 2006, significantly higher than its 14.2 per cent growth during 2006-07. By contrast, metal products, clocking only 3.4 per cent in April, and transport equipment, doing only 5.5 per cent, were both substantially below their growth rates during 2006-07. Automobile sales data released by the industry association tend to corroborate evidence of a slowdown in the sector. If so, this is an intended consequence of interest rate increases. Most of the other major sectors do not deviate significantly from their growth rates during last year. Overall, very little can be made of these numbers once the uncharacteristic patterns in wood and food products are taken note of. To the extent that they are an important pre-cursor to the RBI's decisions on interest rates and liquidity next month, they do tilt the scales in favour of a hike. However, the index numbers for May will be available before the policy announcement; those, along with any data corrections, should make the picture a little clearer.