On Thursday, the quick estimates of the index of industrial production (IIP) for the month of May were released, showing a small but significant positive growth of 2.4 per cent after months of stagnation or decline. It is dangerous to read too much into this number. Not only is it very low, but the series itself is notoriously volatile. In fact, the government’s statisticians had to simultaneously revise their estimate of the previous month’s growth in IIP: it turns out that, in April, industrial production shrank by 0.9 per cent instead of growing at 0.1 per cent, as claimed earlier. Government data series have had a hard time of late, and this difference will not take away from the scepticism with which the IIP is regarded.
That said, however, when the trend is observed, a tiny yet noticeable uptick in India’s troubled industrial sector seems likely. True, mining is still in severe trouble — it contracted by 0.9 per cent in May, as tardy clearances and court-imposed controls continue to bite. In addition, the 7.7 per cent decline in the output of capital goods suggests that investment and capital formation are still far short of recovering, implying that any return for India to a high-growth path is still some time in the future. However, consumer goods grew by 4.3 per cent on the back of a strong performance by the consumer durables sector; manufacturing, overall, grew at 2.5 per cent. These numbers should provide some cautious optimism. Yet the government, which seems to have finally begun to show a sense of realism and even some urgency when it comes to economic matters of late, should view these possible green shoots of recovery with the proper perspective. Basically, it must intensify its efforts to stimulate, in the short term, a recovery of industrial growth — through administrative action, swifter clearances, and prioritising its own public saving through infrastructure investment. It cannot rely on consumer demand to nurture the beginnings of recovery. While the latest inflation numbers are not out till Monday, it appears likely that they will be the highest seen this year. Food prices are already reportedly rising thanks to inconsistent monsoon rain. Demand will correspondingly weaken. For the short term, therefore, there is no alternative but to stoke “animal spirits” through highly visible pro-investment measures.
However, even as India moves – perhaps – out of the lowest point of its manufacturing business cycle, it is important to look at the magnitude of cycle as a whole. Simply put, a fast-growing economy with abundant human resources cannot afford to have a manufacturing business cycle in which the low points are negative and the high points barely in the double digits. The biggest lesson of this overall slowdown is that India’s weak manufacturing continues to be the millstone around its growth story. The National Manufacturing Policy, which aims to create clusters where industrial growth can take off, is still delayed — partly because of concerns over its impact on labour and environmental laws. The industrial sector’s continuing distress should show the government that the manufacturing policy cannot be delayed much longer.