There is no recovery. India has not bottomed out
When the industrial production statistics for the month of August 2012 were released last month, many observers quickly declared that the economy had bottomed out. The index of industrial production (IIP) for August 2012 was 2.5 per cent higher than for August 2011. Some senior government figures publicly claimed the 2.5 per cent per cent year-on-year growth indicated the Indian economy had turned a corner. However, as this newspaper warned at the time, greater caution was warranted. And, indeed, the figures for industrial production revealed on Monday, which pertain to the month of September, should make for a suitable – if shocking – corrective to that sort of optimism. The IIP has shrunk by 0.4 per cent year-on-year.
A decline in industrial output in September 2012 means that the entire April-September period saw the industrial sector expand 0.1 per cent — in effect, it did not grow at all. Manufacturing shrank by 1.5 per cent in September, year-on-year; and the power sector, which has for so long supported the IIP, grew only 3.9 per cent. Overall, in the April-September period, manufacturing shrank 0.4 per cent. Clearly the government’s desperate efforts to talk up “sentiment” and “animal spirits” are insufficient to end the stagnation of India’s manufacturing. The problem with a focus on sentiment and “doom and gloom” as responsible for this industrial freeze is that the government then does not appear to be seriously considering the very real possibility that recovery in the sector is not automatic — that the stagnation is a product of structural factors that will need to be addressed. Certainly, in spite of optimistic forecasts for a sudden rebound in the third and fourth quarters of this financial year, the -12.2 per cent figure for capital goods output year-on-year suggests that recovery, far from being around the corner, is very distant indeed.
The usual caveats must apply, of course, about the volatility of the IIP series. In addition, the figures for September and October of any year can sometimes give misleading year-on-year effects, if the date of Diwali varies widely between two years — as it does between 2012 and 2011. Many observers have been most shocked by the fact that consumer goods output actually shrank by 0.3 per cent compared to September 2011, suggesting that demand has weakened substantially. Perhaps this conclusion should be held in abeyance, as the pre-Diwali ramp-up in consumer goods production will have started later this year than it did in 2011.
The government, whatever it may say in public about the temporary nature of the slowdown, surely must recognise that it has been a principal cause in allowing matters to come to this pass. Old and obsolete regulations have been allowed to persist; governance reforms have been left too late, allowing political risk to explode, turning off investors. Thus, big private investors are debt-laden. The Centre, meanwhile, is cash-strapped from funding fuel subsidies. The Reserve Bank of India continues to be unwilling to cut policy rates while inflation, fed by fuel prices, is high. Frankly, very few short- or even medium-term fixes seem feasible. A long winter lies ahead for manufacturing.
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